Economics Unit 2 Notes

Circular flow model

• Represents the transactions within an economy
• Goods and services flow clockwise
• Two markets that we talk about in circular flow model:
• Resource/Factor Market- Place where households sell resources and businesses buy resources
• Product Market- Place where goods and services are produced and are bought and sold to the households
• Three economic factors:
• Household- Person or group of people that share their income
• Government-
• Firm- Organization that produces goods and services for sale

GDP (Gross Domestic Product)

• Total dollar value of all goods and services produced within a country's borders within a given year

GNP (Gross National Product)

• Total value of all final goods and services produced by Americans in a year

Included in GDP:

• C+Ig+G+Xn
• C-Consumption
• 67% of the economy
• Final good or service
• Ig-Gross Private Domestic Investment
• Factory Equipment Maintenance
• New Factory Equipment
• Construction of Housing
• Unsold Inventory of Products Built in a Year
• G-Government Spending
• Military Spending
• FBISD Hires New Workers etc.
• Xn-Net Exports
• Exports-Imports

Excluded from GDP:

1. Non-market Activities
• Volunteering
• Family Work
• Illegal drugs
2. Intermediate Goods
• Goods and services that are purchased for resale or for further processing and manufacturing
• Anything that goes into making a product
• Avoid multiple or double counting
3. Used or Secondhand Goods
• Clothing from a thrift shop
4. Financial Transactions
• Stocks
• Bonds
• Real Estate
5. Gifts or Transfer Payments
• Public
• Public transfer payments
• Recipients contribute nothing to the current production
• Welfare payments or social security
• Taxes paid by individuals are given to the public
• Private
• Private transfer payments produce no output
• Simply transfer funds from one private individual to another
• Ex: Scholarship

Expenditure Approach to GDP

• Add up market value on all foreign expenditures made on final goods and services made in a single year
• C+Ig+G+Xn=GDP
• Most reliable and popular method of calculating GDP

Income Approach to GDP

• Add up all of the income earned by households and firms in a single year
• W+R+I+P+Statistical Adjustments=GDP
• (Wages)+(Rents)+(Interest)+(Profit/Proprietor’s Income)+Statistical Adjustment
• Not very reliable since people don’t report all incomes

Formulas:

• Budget= Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collection
• If Number is Positive, It is a deficit
• If Number is negative, it is a surplus
• Trade= Exports-Imports
• GNP=GDP+Net Foreign Factor Payments
• NNP(Net National Product)= GNP-Depreciation
• NDP(Net Domestic Product) = GDP - Depreciation
• National Income =
• GDP-Indirect Business Taxes - Depreciation - Net Foreign Factor Payments
• Compensation of Employees + Rental Income + Interest Income + Proprietor’s Income + Corporate Profits
• Disposable Personal Income = National Income - Personal Household Taxes + Government Transfer Payments

Nominal GDP

• Value of output produced in current prices
• Price x Quantity = Nominal GDP
• Can increase from year to year if either output or price increase

Real GDP

• Value of output produced in constant or base year prices
• Price x Quantity = Real GDP
• Can increase from year to year only if output increases
• Output is measured by quantity
• Reason why real GDP reflects base year price is because it accounts for inflation

	Year 1	Year 4	Year 1	Year 4
Computers	10	17	$2,000	$2,200
Televisions	15	20	$500	$550

Nominal GDP Year 4 = $48,400

Real GDP Year 4 = $44,000

Price Index

• Measures inflation by tracking changes in the price in the market basket of goods compared with the base year
• (Price of market basket of goods in current year)/(Price of market of goods in base year) x 100 = Price Index

GDP Deflator

• Price index used to adjust from nominal to real GDP
• In the base year, GDP deflator will equal 100
• For years after the base year, the GDP deflator is greater than 100
• For years before the base year, the GDP deflator is less than 100
• (Nominal GDP)/(Real GDP) x 100 = GDP Deflator

Calculate Inflation

• ((New GDP Deflator) - (Old GDP Deflator)) / (Old GDP Deflator) x 100