Unit II

INTRODUCTION
Okay, so I can admit I have gotten a little lazy when it came to creating these blogs, (as you can see from Unit I). I've decided it would probably be best to actually put some effort into creating these posts based on what I took during class rather than just pictures of my bad handwriting.

Types of Economic Systems
There are a total of 4 economic systems in the world:

 

Command

• Centrally planned
• Government deader
• Government owns all lands and capital
• Government controls all labor

Traditional

• Includes rituals, habits, customs
• All decisions are made by elder(s)

Free Market

• People and firms act on self-interest
• Allows buyers and sellers exchange goods and services

 Mixed

• Similar to a free market
• Government regulates businesses to protect the public's interest

Before you jump out saying that the U.S. is a Free Market, you might want to think again. In actuality, the U.S. is an example of a mixed economy. Think about it. Sure, the U.S. consists of many different independent business. But don't you hear about the government bailing out businesses, such as banks, on the news? That, right there, is the government regulating business.

Economic Questions that Society Must Answer
There are a total of 3 societies must answer:

1. WHAT goods and services should be produced?
2. HOW will the goods and services be produced?
3. WHO will consume these goods and services?

To be honest, these questions should obvious to anyone. What's economy without knowing how to market your products and what your products even are?

The Market Economy
Speaking of markets, what EXACTLY is it anyway? A market is an institution or mechanism allowing buyers and seller to make trades. There are two types of markets:

• Product Market: This the market where the buyer is usually a consumer and the seller is a firm.
• Factor Market: The buyer is usually the firm and the seller is the factor owner. This includes land, labor, entrepreneurship, and capital, with labor the most important of the four.

Another important detail that shouldn't be overlooked is that it is households and firms that take part in the Product and Factor Market.

• Households- Person or a group of people that share their income
• Firm- an organization that produces goods and services for sale

GDP and Everything Surrounding It

Yeah, I know. "GDP and Everything Surrounding It"? Well, I have to admit there is not a word, phrase, or concept that I can think of that would sum up the following information. First off, you need to know what GDP is. It's short for Gross Domestic Product and is basically the total value of all final goods and services. GDP includes all of production and income earned in the U.S. and foreign producers. It excludes production outside the U.S. even by Americans. There are two ways to calculate GDP:

Expenditure Approach: Personal Consumption (+) Gross Private Domestic Investment (+) Government purchases of goods/services (+) net exports [imports (-) exports]

Income Approach: Wages (+) Rent (+) Income (+) Profits

It is also important not to get GDP mixed up with GNP. GNP is short for Gross National Product and includes the total value of all final goods and services produced by Americans in a year and production or income earned by Americans anywhere in the world. GNP excludes productions by non-Americans even in the U.S.

Other calculations that are instrumental in economy include:

• Net National Product (NNP)- GNP (-) Depreciation
• Net Domestic Product (NDP)- GDP (-) Depreciation

National Income or NI is income owned by American owned resources whether here or abroad. There are a total of 3 ways to calculate National Income:

1. NNP - Indirect Business Taxes [IBT]
2. Compensation of Employees [CE] (+) Rental Income [RI] (+) Interest Income [II] (+) Corporate Profits [CP] (+) Proprietor's Income [PI]
3. GDP (-) IBT (-) Depreciation (-) Net Foreign Factor Payment [NFFP]

Disposable Personal Income [DPI] is the amount that is available for household consumption after tax and can be expressed as:

• NI (-) household taxes (+) government transfer payments

Nominal Gross Domestic Product [NGDP] measures GDP in current prices regardless of the output with the equation being:

• Price * Quantity

Real Gross Domestic Product [RGDP] measures GDP in constant dollars adjusted for inflation, with the equation being:

• Base Year Price * Quantity

It should be noted that if a base year is not given, it should be assumed the first year given IS the base year.

A GDP Deflator is a measure of level of prices of all new domestically produced final goods and services in an economy and is expressed as:

• (NGDP/RGDP) * 100

The Consumer Price Index [CPI] is the most widely used measure of overall price level in the U.S. and can be measured as:

• (Price of market basket in the particular year/Price of the same market basket in base year) * 100

Inflation

Okay, so the whole reason that Inflation has its own little section to itself is because there are many concepts that fall under it. Inflation is the rise in general price level and can be expressed as:

• (Price Index of Current Year (-) Price Index of Previous Year)/Price Index of Previous Year

Another couple of concepts that should not be confused with each other include, deflation and disinflation. Deflation is the decline in the general price level, while disinflation occurs when the inflation declines.

There are 3 ways into solving inflation:

• Find the inflation rate (already given)
• The Rule of 70- (How many years it will take to double inflation)*(70/n)
• Real Interest Formula- Inflation (-) Nominal Interest Rate

Right now, you're probably looking at 'Nominal Interest Rate' and saying, "But how do I find that?!". Calm down, I'm about to explain that too. Nominal Interest Rate is just the unadjusted cost of borrowing or lending money, similar to the concept of NGDP.

There are two causes of inflation:

• Demand Pull: caused by an excess of demand over output that pulls prices upward
• Cost Push: caused by rise in per unit production costs due to increasing resource cost.

Like the causes, there are two effects of inflation:

• Anticipated- Expected rise in general price
• Unanticipated- Stronger effects because those expecting inflation may be able to adjust their work spending activities to avoid or lessen the effects.

Wages/Pensions may have cost of living adjustments [COLAS] built into off set anticipated inflation. Expected inflation increases the nominal cost of borrowing, while unexpected inflation reduces the real cost of borrowing.

Hurt by Inflation:

• Fixed Income Group
• Savers (inflation takes away from the interest earned on the account)
• Lenders

Helped by Inflation:

• Borrowers

Unemployment

The unemployed failed to use available resources [labor]. This includes:

• new entrants
• reentrants
• laid off
• lost last job
• quit last job

Those not included in the labor force [employed and employed] include:

• armed forces
• homemakers
• students
• retirees
• disabled persons
• discouraged workers
• prisoners
• mental institutes

To calculate the unemployment rate, one must use the equation:

• (# of unemployed/Total Labor Force) * 100

The standard rate is between 4% and 6%.

There are 4 types of Unemployment

• Frictional- temporary, transitional, short term; in between jobs and searching for job; include graduates and those that get fired or quit; signals that new jobs are available.
• Cyclical- caused by the recession phase of the business cycle; deficient demand for goods and services
• Structural- technological or long term; caused by automotion; due to consumer tastes, jobs might become obsolete
• Seasonal- Weather related or seasonal jobs

Full Employment is the same as the natural rate of employment [NRU]. It should be confused with zero unemployment and is equal to both structural and frictional employment.