Unit 7

INTRO:

Alrighty then, the last Unit for this subject, times goes by so fast. It feels like only yesterday that I entered the classroom. I'll say, it was one heck of a year, and I'm going to miss every second of it.

BALANCE OF PAYMENTS:

Balance of Payments

• Measure of money inflows and outflows between the U.S. and the World (ROW).
• Inflows are referred to as credits
• Outflows are referred to as debits
• The Balance of Payments is divided into 3 accounts
• Current Account
• Capital/Financial Account
• Federal Reserves Account
• Every transaction in the balance of payments is recorded twice in accordance with standard accounting price
• Ex) US manufacture, John Deere, exports $50 million worth of farm equipment to Ireland.
• A credit of $50 million to the capital/financial account (+ $50 million worth of Euros or financial assets)

Current Account (Net Investment, Net Transfers,, Net Exports)

• Balance of Trade or Net Exports
• Exports of Goods/Serves- Imports of Goods/Services
• Exports create a credit to the balance of payments
• Imports create a debit to the balance of payments
• Net Foreign Income
• Income earned by US owned foreign assets- Income paid to foreign held US assets
• Ex) Interest payments on US owned Brazilian bonds- Interest payments on German owned US Treasury bonds
• Net Transfers (tend to be unilateral)
• Foreign Aid --> a debit to the current account
• Mexican workers send away to family back in Mexico

Capital/Financial Account (Stocks/Bonds, Assets)

• The balance of capital ownership
• Includes the purchase of both real and financial assets
• Direct investment in the US is a credit to the capital account
• Ex) the Toyota Factory in San Antonio
• Direct investment by US firms/individuals in a foreign country are debits to the capital account
• Ex) Intel Factory in San Jose, Costa Rica.
• Purchase of foreign financial assets represents a debit to the capital account
• Ex) Woman Buffet buys stock in Petrochina.
• Purchase of domestic financial assets by foreigners represents a credit to the capital account.
• Ex) The United Arab Emirates Sovereign wealth finds purchases a large stake in NASDAQ.  
• What causes Capital/Financial Flows?
• Differences in rates of return of interest
• Ceteris Paribus, savings will flow toward higher returns
• Relationship between Current and Capital account
• Remember double entry bookkeeping?
• The current account and the capital account should zero each other out.
• That is... if the current account has a negative balance (deficit), then the capital account should then have a positive balance (surplus)

Official Reserves

• The foreign currency holdings of the United States Federal Reserve System
• When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments.
• When there is a balance of payments deficit, the Fed depletes its reserves of foreign currency and credits the balance of payments
• The Official Reserves zero out the balance of payments

CREDITS VS. DEBITS:
 
Credits (Additions to a nation's account) Debits (Subsidies to a nation's account)

• How to calculate the following:
1. Balance on Trade
• merchandise & service exports (-) merchandise & service imports
2. Trade deficits occurs when the balance on trade is negative (Imports > Exports)
   Trade surplus occurs when the balance on trade is positive (Exports > Imports)
3. Balance on Current Account
• Balance on Trade [exports/imports] (+) Net investment outcome (+) Transfer Payments
4. Official Reserves
• Nationally change in Capital Account (+) change in Current Account (+) change in Official Reserves = 0

FOREGIN EXCHANGE


Foreign Exchange (FOREX)

• The buying and selling of currency
• Ex) In order to purchase souvenirs in France,  it is first necessary for Americans to sell (supply) their dollars and buy (demand) Euros.
• The Exchange rate (e) is determined in the foreign currency markets.
• Ex) the current exchange rate is approximately 77 Japanese Yen to 1 US Dollar
• Simply put, the exchange rate is the price of a currency.
• Do not try to calculate the exact exchange rate

Changes in Exchange Rates

• Exchange rates (e) are a function of the supply and demand for currency.
• An increase in the supply of a currency will decrease the exchange rate of currency
• A decrease in supply of a currency will increase the exchange rate of a currency
• A increase in demand for a currency will increase the exchange rate of a currency
• A decrease in demand for a currency will decrease the exchange rate of a currency

Appreciation/Depreciation

• Appreciation- currency increase in value (e up)
• Depreciation- currency decrease in value (e down)
• Ex) Germans go to America to shop, supply of Euros increase and demand for dollars will increase. This causes the Euro depreciate and dollar appreciates

Exchange Rate Determinants

• Consumer Tastes
• Ex) went for Japanese goods create increase in dollar supply in the currency exchange market which leads to depreciation of dollar and appreciation of Yen
• Relative Income
• Ex) Mexico's economy is strong and the US economy is in recession, then Mexicans will buy more American goods, in creating demand for the dollar, causes the dollar to appreciate and the peso to depreciate.
• Relative Price Level
• Ex) Price level is higher in Canada than in the US, American goods cheaper than Canadian goods, Canadians import more US goods causing dollar to appreciate and Canadian Dollar to depreciate.
• Speculation
• Ex) If US expect Swiss interest rates to climb, US will demand Swiss Francs in order to earn higher rates of return
• Demand $- Exports and Capital Inflows
• when the US exports goods/services to other countries, they need OUR dollar to complete the transaction.
• so they demand OUR money, first, they need to supply theirs.  
• Supply $- imports and capital outflows
• When we import goods/services from other countries, we need THEIR money to complete the transaction. 
• so we demand THEIR money, we need to supply ours
• TIPS
• Always change the D line on one currency graph, the S line o the other currency's s graph.
• Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer
• If D on one graph increases, S on the other will increase
• If D moves to the left S will move to the left on the other graph.

Unit V & VI

INTRO:
So while everyone else is freaking out whether or not to do the blog or not, I'm just gonna go ahead and post mine up. To be honest, this unit is not even that long, so no big.

FROM SHORT RUN TO LONG RUN:

Short Run:

• AS curve doesn't shift in response to changes in the AD curve in the short run.
• i.e. Nominal wages do not respond to price level changes
• Workers may not realize impact of the changes in may be under contract.

Long Run

• period in which nominal are fully responsive to previous changes in price level.
• When changes occur in the short run they result in either increased or decreased producer profits- not changes in wages paid.
• In the long run increases in AD result in a higher price level, as in the short run, but as workers demand more money the AS curve shifts left to equate production at the original output level, but now at a higher price.
• In the long run, the AS curve is vertical at the natural rate of unemployment (NRU), or full employment (FE) level of output. Everyone who wants a job has one and no one is enticed into or out of the market.

Demand-Pull Inflation

• will result when an increase in demand shifts the AD curve to the right temporarily increasing output

Cost-Push Inflation

• when an increase in input costs that shifts the AS curve to the left. In this case the price level increase is not in response to the increase in AD, but instead the cause of price level increasing.

PHILLIP'S CURVE

• represents the relationship between unemployment and inflation
• the tradeoff between inflation and unemployment only occurs in the short rune.
• Each point on the curve corresponds to a different level of output

THE LONG RUN PHILLIPS CURVE (LRPC)

• occurs in the natural rate of unemployment.
• represented by a vertical line.
• there is no tradeoff between unemployment and inflation in the long run.
• the economy produces at the full unemployment output level
• the nominal wages of workers fully incorporate any changes in price level as wages adjust to inflation over the long run
• LRPC will only shift if LRAS shifts.
• Increases in NRU will shift LRPC ->
• Decreases in NRU will shift LRPC <-
• If the natural rate of unemployment changes the LRPC moves
• 3 types of NRU move
• Frictional
• Structural
• Seasonal

THE SHORT RUN PHILLIPS CURVE (SRPC)

• Assumed to be stable in the short run, because the SRAS is stable.
• increases AD = Up/Left movement along SRPC
• decrease in AD= down/right along SRPC
• SRAS -> = SRPC <-
• SRAS <- = SRPC -> 

OTHER THINGS

Supply Shocks

• Rapid/significant increases in resource cost, which causes the SRAS curve to shift thus producing a corresponding shift in the short run Philip's Curve (SRPC)

Misery Index

• A combination of inflation and unemployment in any given year; Single Digit Misery is good.

Understanding Stagflation

• High unemployment and high inflation at the same time

Disinflation

• When inflation decreases over time.

Supply Side Economics/Reaganomics

• support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments such as unemployment and social security payments provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.

Marginal Tax Rates

• the amount paid on last dollar earned or each additional dollar earned.
• By reducing the marginal tax rate, supply siders believe that you will encourage more people to work longer foregoing leisure time for extra income

Laffer Curve

• tradeoffs between tax rates and tax revenues.
• Criticisms of the Curve
• where the economy is actually located on the curve is difficult to determine.
• tax cuts also increase demand which can fuel inflation
• empirical evidence suggest that the impact of tax rates on incentives to work and invest and save are small.

Unit IV

INTRO:

Throughout this chapter, we get into the uses of money and its involvement in the bank. To be honest, I was quite ignorant to the functions of banks in the economy and thought it was just a place to hold all my money. Although I may have not COMPLETELY comprehended this unit, I have learned a lot of the different functions of money that I have overlooked before and the bank's role in the economy.

USES OF MONEY:

This unit breaks down of the purpose of money. Money can be used as each of the following:

• Medium Exchange
• This includes bartering or trading, and was used in a neolithic society.
• Unit of Account: 
• Establish economic wealth
• Store of Value
• money holds value over a period of time.

TYPES OF MONEY:

Money, after all, is not all just cash and coins. In fact, this unit shows how many other objects, that you wouldn't expect, to be acceptable as money. This includes:

• Fiat Money
• Think of the U.S. Dollar. Why is it money? Because our government says so. If they wanted, they could even say bottle caps are our new currency. This is Fiat Money. 
• Commodity Money
• Gold and silver. They are considered high in value because of its material, making it commodity money. I mean, why else would a bunch of families travel across the country when they heard of the gold rush in California? 
• Representative Money-
• Have you or a friend ever needed money and decide to borrow, lets say $5, from someone else? If you have one of THOSE friends, then you probably had to write them out an I.O.U. note. This I.O.U. note is actually an example of representative money, because it is suppose to back up the $5 that you now owe that person. Bringing back the U.S. Dollar, its face value that represents is quantity, exceeds the material substance, the paper.

CHARACTERISTICS OF MONEY:

What's there to say? Money is green and crispy. Well, lets think a little bit more logical through all these -abilitys. (You see what I did there?)

• Durability
• Portability
• Divisibility
• Uniformity
• Scarcity
• Acceptability

MONEY SUPPLY:

• M1 Money
• consists of currency in circulation, coins and paper money, checkable deposits/demand deposits (or checks), and traveler's check.
• M2 Money
• consists of M1 money plus savings accounts plus money market accounts plus deposists held by banks outside the U.S.
• Fractional Reserve Banking
• The process by banks upholding a small portion of their deposits in reserve and loaning out the excess.
• Banks keep cash on hand (required reserves) to meet depositer's needs.
• Banks must keep reserve deposits in their vaults or at the federal reserve bank.
• Total reserves (total funds held by bank) = required reserves (rr) + excess reserves (er)
• Banks can legally lend only to the extent of their excess reserves
• Reserve ratio= rr/er

SIGNIFICANCE OF A FRACTIONAL RESERVE SYSTEM

• Banks can create money by lending more than their reserves.
• Required reserves do not prevent Bank panics, because banks must keep their required reserves (FDIC)
• Reserve requirement gives the FED control over how much money banks can create.

FUNCTIONS OF THE FED (FEDERAL RESERVE BANK)

• To control the money supply through monetary policy (circulation of currency and adjusting the interest rate).
• Issue Paper money
• Serve as a clearing house for checks.
• Regulating Banking Activities.
• Serve as a bank for banks.

BALANCE SHEET

• Statement of assets and claims summarizing the financial position of a firm or a bank at some point in time and must ALWAYS balance out. 

RESERVE REQUIREMENT

• The percentage of the demand deposits that the bank is required to keep at vault cash or on reserves as federal funds in the banks account with the federal reserve.   
• In most cases, the FED sets the reserve requirement to 10%.
• It is the least used tool to changing monetary policy.

MONETARY MULTIPLIER

• Shows us the impact of a change in demand deposits in loans and eventually the money supply.
• Indicates the total percentage of money created in the banking system by each $1 addition to the monetary base. (Bank reserves and currency in circulation)
• Monetary multiplier = 1/rr

REVIEW (do not remember why I labeled it as so...)

• rr= amount of deposit * required reserve ration
• er= total reserves - rr
• Maximum amount a single bank can lend * monetary multiplier
• Total change in loans= amount single bank can lend * monetary multiplier
• Total change in the money supply= total change in loans + $ amount of FED action
• Total change in demand deposits = total change in loans + any cash deposited

WAYS OF STABALIZING THE ECONOMY

• Fiscal policy
• Congress can Tax or Spend
• Money Policy
• FED
1. OMO (Open Market Operations)- Buy or sell bonds/securities to commercial banks or public. [prefered due to flexibility]
2. Reserve Requirement
3. Discount Rate- The interest rate charged to commercial banks for overnight loans.
4. Federal Funds rate - interest rate change by one commercial bank for overnight loans to another commercial bank; Rate is negotiated by banks themselves.
• The FED has several tools to manage the money supply by manipulating the excess reserves held by banks, a practice known as monetary policy.

• Monetary Policy Option	Expansionary (“easy” money)	Contractionary (“tight” money)
  OMO	Buy back bonds from public.	Sell bonds to public.
  RR	Decrease reserve ratio.	Increase reserve ratio.
  Discount Rate	Decrease discount rate	Increase discount rate.
  Federal Funds Rate	Decrease federal fund rate.	Increase Federal Fund Rate
  Money Supply	Increase Money Supply	Decrease Money Supply.

LOANABLE FUNDS MARKET

• The market where savers and borrowers exchange funds at the real rate of interest.
• The demand for loanable funds, or borrowing comes from households, firms, government, and the foreign sector.
• The demand for loanable funds, or savings comes from households, firms, government, and the foreign sector. The supply of bearable funds is also the demand for bonds. 

CHANGE IN THE DEMAND FOR LOANABLE FUNDS

• Demand for loanable funds= borrowing (i.e. supplying bonds)
• More borrowing = more demand for loanable funds (-->)
• Less borrowing = less demand for loanable funds (<--)
• ex) government deficits spending= more borrowing= more demand for loanable funds.

CHANGE IN SUPPLY OF LOANABLE FUNDS

• Remember that supply of loanable funds = saving (i.e. demand for bonds)
• More saving = more supply of loanable funds (-->)
• Less saving = less supply of loanable funds (<--)
• ex) Government budget surplus = more saving= more supply of loanable funds.

PRIME RATE

• the rate that banks charge to their most credit worthy customers. 

Unit III

INTRODUCTION

So it was a little difficult to get my notes all together, because of how disorganized I am. Hopefully, I gathered all the notes that I needed to understand this concept to explain.

AGGREGATE DEMAND (AD)

Aggregate Demand shows the amount of Real GDP that the private, public and foreign sector collectively desire to purchase at each possible level. The relationship between the price level and the level of real GDP is inverse.

There are 3 reasons AD is downward sloping:

• Real Balance Effect
• When the price level is HIGH households and businesses CANNOT afford to purchase as much input. 
• When the price level is LOW households and businesses CAN afford to purchase more output.
• Interest Rate Effect
• a higher price level INCREASES the interest rate which lends to DISCOURAGE investment.
• a lower price level DECREASES the interest rate which lends to ENCOURAGE investment.
• Foreign Purchase Effect
• a HIGHER price level increases the demand for relatively cheaper IMPORTS.
• a LOWER price level increases the foreign demand for relatively cheaper US EXPORTS.

Shifts in AD

There are two parts in a shift in AD:

• a change in C, I, G, and or Xn
• a multiplier effect that produces a greater change than the original change in the 4 components
• Increase in AD = AD -->
• Decrease in AD = AD <--

Determinants of AD Shifts

[C] Consumption

household spending is affected by:

• Consumer Wealth
• MORE wealth = MORE spending (AD shifts -->)
• LESS wealth = LESS spending (AD shifts <--)
• Consumer Expectations
• POSTIVE expectations = MORE spending
• NEGATIVE expectations = LESS spending
• Household Indebtedness
• LESS debt = MORE spending
• MORE debt = LESS spending

[Ig] Gross Private Investment

Investment Spending is sensitive to:

• The Real Interest Rate
• LOWER real interest rate = MORE investment
• HIGHER real interest rate = LESS investment
• Expected Returns
• HIGHER expected returns = MORE investment
• LOWER expected returns = LESS investment

Expected Returns are influenced by:

• Expectations of future profitability
• Technology
• Degree of excess capacity (Existing Stock of Capital)
• Business taxes

[G] Government Spending

• more government spending (AD -->)
• less government spending (AD <--)

[Xn] Net Exports

Net exports are sensitive to:

• exchange rates (international value of $)
• strong $ = MORE imports and FEWER exports = (AD <--)
• weak $ = FEWER imports and MORE exports = (AD -->)
• relative income
• STRONG foreign economies = MORE exports = (AD -->)
• WEAK foreign economies = LESS exports = (AD <--)

AGGREGATE SUPPLY (AS)

Aggregate Supply is the level of Real GDP that firms will produce at each Price Level (PL).

Long-Run v. Short-Run

• Long-Run
• period of time where input prices are completely flexible and adjust to changes in the price level.
• in long run, the level of real GDP supplies is independent of price level.
• Short-Run
• Period of true where input prices are sticky and do not adjust to changes in price level.
• level of real GDP supplied directly related to price level. 

Long-Run Aggregate Supply (LRAS)

• The Long-Run Aggregate Supply or LRAS marks the level of full employment in the economy (analogous to PPC). LRAS is vertical at full employment.

Changes in SRAS

• an INCREASE in SRAS is seen as a shift to the RIGHT. (SRAS -->)
• a DECREASE in SRAS is seen as a shift to the LEFT. (SRAS <--)

Determinants of SRAS

• input prices
• increase in resource prices = SRAS <--
• decrease in resource prices = SRAS -->
• productivity
• productivity: total output/ total inputs
• MORE productivity = LOWER unit production cost = SRAS -->
• LOWER productivity = HIGHER unit production cost = SRAS <--
• [R] Resource Cost [domestic]
• Land- new raw materials (oil) are found
• Labor- labor force increases or wages decrease
• Capital - capital stock increases
• The number of sellers of resources increase
• [E] Environment [legal-institutional environment for business change]
• Subsidies are increased
• Regulations on businesses are decreased
• Business taxes decrease
• [P] Productivity
• Technological breakthrough leads to an increase in productivity [getting more outputs from the same inputs]

Keynesian View

• the followers of the Keynesian view believe in a horizontal AS curve, because when the economy is below full employment AD shifts outward. ( Increase in RGDP, Decrease in Unemployment, price level constant)

Classical (Vertical) View

• In the long run, the AS curve is vertical, because the only effects of an increase in the price level and supply creates its own demand. (Say's Law)

Intermediate Range

• AS is between the classical and Keynesian Range. When this occurs as AS shifts outward, price level and RGDP increases.

THE AS/AD MODEL
The equilibrium of AS and AD determines current output (RGDP) and the price level (PL)

Full Employment

• Full Employment Equilibrium exists where AD intersects SRAS and LRAS at the same point

Recessionary Gap

• Exists when equilibrium occurs below full employment output.

Inflationary Gap

• exists when equilibrium occurs beyond full employment output.

Changes in AD

• Consumption/Government Spending/Net Export INCREASES
• AD shifts RIGHT.
• Real GDP INCREASES.
• Price Level INCREASES.
• unemployment DECREASES.
• inflation INCREASES.
• Consumption/Government Spending/Net Export DECREASES
• AD shifts LEFT.
• Real GDP DECREASES.
• Price Level DECREASES.
• unemployment INCREASES.
• inflation DECREASES.

 Changes in SRAS

• Input Prices/Productivity/Legal-Institutional Environment INCREASES
• SRAS shifts RIGHT
• Real GDP INCREASES
• Price Level DECREASES
• Unemployment DECREASES
• Inflation DECREASES
• Input Prices/Productivity/Legal-Institutional Environment DECREASES
• SRAS shifts LEFT
• Real GDP DECREASES
• Price Level INCREASES
• Unemployment INCREASES
• Inflation INCREASES

Long-Run Aggregate Supply (LRAS)

• LRAS measures potential output and assessing if resources are used efficiently.

 

• efficient at (B)
• no pressure to raise or lower fact or prices
• inefficient or under utilizers resources at (A)
• Factor prices are pressure to fall
• Over utilizing our resources at (C)
• Factor prices are pressured to rise.

Shift Causes

• Tech
• Economic Growth
• Capital
• Entrepreneurship
• more available resources

What is investment?

Money spent or expenditures on:

• New plants (factories)
• Capital Equipment (machinery)
• Technology (hardware and software)
• New Homes
• Inventions (goods sold by producers)

Expected Rates of Return

• How does business make investment decisions
• cost/benefit analysis
• How does business determine the benefits?
• expected rate of return
• How does business count the cost?
• interest costs
• How does business determine the amount of investment they undertake?
• compare expected rate of return to interest cost
• If expected return > interest cost, then invest.
• If expected return < interest cost, then DO NOT invest.

Real (r%) v. Nominal (n%)

• What's the difference?
• Nominal is the observable rate of interest. Real subtracts our inflation and is only known ex post facto.
• How do you compute the real interest rate (r%)?
• r% = i% - inflation rate
• What then, determines the cost of an investment decision?
• The real interest rate (r%)

Investment Demand Curve (ID)

• What is the shape of the Investment demand curve?
• Downward sloping
• Why?
• When interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable.
• there are few investments that yield high rates of return, and many that yield low rates of return.
• Shifts in Investment Demand (ID)
• Cost of Production
• Business Taxes
• Technological Change
• Expectations
• Stock of Capital

Consumption and Saving

• Disposable Income (DI)
• income after taxes or net income.
• Can either save or spend.
• Consumption
• Household spending
• the ability to consume is constrained by:
• the amount of disposable income
• the propensity to save
• Do households consume if DI = 0?
• autonomous consumption
• dissaving
• Saving
• household NOT spending
• the ability NOT spending
• the amount of DI
• The propensity to consume
• Do households save if DI = 0?
• NO

APC & APS

• Average Propensity to Consume (APC)
• Average Propensity to Save (APS)
• APC (+) APS = 1
• 1 (-) APC = APS
• 1 (-) APS = APC
• APC > 1 Dissaving
• -APC Dissaving

MPC & MPS

• Marginal Propensity to Consume (MPC)
• change in C/ change in DI % of every extra dollar earned that is spent
• Marginal Propensity to Save (MPS)
• change in S/ change in DI % of every extra dollar earned that is saved
• MPC (+) MPS = 1
• 1 (-) MPC = MPS
• 1 (-) MPS = MPC

Determinants of C & S

• Wealth
• Expectations
• Household Debt
• Taxes

The Spending Multiplier Effect

• an initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending, or aggregate demand.
• multiplier = change in AD/ change in spending
• Why does it happen?
• Expenditures and income flow continuously which sets off a spending increases or the economy.
• Calculating the spending multiplier
• The spending multiplier can be calculated from MPC or MPS.
• Multiplier = 1/(1-MPC) or 1/MPS
• Multipliers are (+) when there is an increase in spending and (-) when there is a decrease.

Calculating the Tax Multiplier

• When the government taxes, the multipliers works in reverse
• why?
• Because now money is leaving the circular flow
• Tax Multiplier (note: it's negative)
• -MPC/(1-MPC) or -MPC/MPS
• If there is a tax-cut, then the multiplier is positive, because there is now more money in the circular flow.

MPS, MPC, and Multipliers

• Step 1: Calculate the MPC and MPS
• Step 2: Determine which multiplier to use, and whether it's positive or negative
• Step 3: Calculate the Spending and/or tax multiplier
• Step 4: Calculate the change in AD

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.

Capital and Consumer Goods Video

Unit One Notes (handwritten)