Step 11: What is Real? And what is Nominal?

Nominal GDP

Price x Quantity

• value of output produced in current prices
• can increase from year to year if either output or price increase

Real GDP

Price x Quantity

• value of output produced in constant or base year prices
• can increase from year to year only if output increases
• adjusted for inflation

Price Index

• measures inflation by tracking changes in the price of a market basket of goods compared with the base year
• Market basket of goods
• Price x Quantity
• Formula: (price of market basket of goods in current year/ price of market basket of goods in base year) x 100

GDP Deflator

• a price index used to adjust from nominal to real GDP
• in base year
• GDPD = 100
• years after
• GDPD > 100
• years before
• GDPD < 100
• Formula: (nominal GDP/real GDP) x 100

Inflation Rate

• Formula (new deflator - old deflator/old deflator) x 100

Step 10: Budget. Not Budging

Budget

• government purchases of goods and services 
• + government transfer payments 
• - government tax and fee collection

(If + deficit)

(If - surplus)

Trade (Basically Xn)

Export - Import

GNP (Gross National Product)

• GDP + Net foreign factor payment

NNP (Net National product)

• GNP - depreciation

NDP (Net Domestic product)

• GDP - depreciation

NI (National income)

• GDP 
• - indirect business taxes 
• - depreciation 
• - Net Foreign Factor PaymentsOR
• compensation of employees 
• + rental income 
• + interest income
• + proprietor's income 
• + corporate profits 

DPI (Disposable Personal Income)

• National Income 
• - personal household taxes 
• + government transfer payment

Step 9: GDP. Not that kind of gross.

GDP

-Gross Domestic Product

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

-Any products and income produced on American soil
-Note: Gross=Total

GDP Formulas

-Two approaches
-Expenditure GDP=Income GDP

• Expenditure Approach

           -add up the market value of all domestic expenditures made in final goods and services in a single year

C  +  Ig  +  G  +  Xn  =  GDP

 -Consumption

                      -contributes 67% to the economy

                      -purchased finished goods and services

-Ig (Gross Private Domestic Investment)

                      -factory equipment maintenance

                      -new factory equipment

                      -new construction housing

                      -unsold inventory of products built in a year

-Government Spending

                      -School District counted a gov't

-Net Exports

                      -Exports - Imports = Net Exports

-Excludes:

• Used/Secondhand Goods
     -because a good is used, it has already been counted in the year it was produced's GDP
• Intermediate Goods

                      -goods and services purchased for resale or for further processing/manufacturing

                      -avoid 2x or multiple counting                      

• Non-market Activity

                      -illegal drugs, prostitution

                      -unpaid work, babysitting

• Financial Transactions

                      -stocks, bonds, real estate

                      -excluded b/c there is nothing being produced

• Gifts or Transfer Payments

                      -Private: no output, transfers funds from a private individual to another; scholarships
                      -Public: recipients contribute nothing to current output or production; welfare, social security

• Income Approach

           -add up the income earned by households in a single year

W  +  R  +  I  +  P  +  Statistical Adjustments  =  GDP

           -Wages

           -Rents

           -Income

           -Profits/Proprietor's Income

Nominal GDP

-Value of output produced in current prices
-Can increase from year to year if either price or output increases
-calculated by Price x Quantity

Real GDP

-Value of output produced in constant or base year prices
-Adjusted for inflation
-Can increase from year to year only if output increases
-calculated by Base Year Price x Quantity

GNP

-Gross National Product

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

-Includes products outside US borders.

Step 8: Circular Flow Model

Circular Flow Diagram -

• represents transaction in an economy (ex: like the market)

Economic Factors -

1. Household : person/group that shares income
2. Government :
3. Firm : organization that produces goods and services for sale

Market - 

1. Resource/Factor : place where household sells resources and businesses buy resources
2. Product : place where goods and services are produced by businesses and both are sold by household

Step 7: Let's get down to business! Or to the business cycle, at least. (Start of Unit 2)

Stages of the Business Cycle

The red arrows denote a period of decreasing real GDP, while the blue arrows denote the opposite.

-Each business cycle is measured from trough to trough
-We do not know what stage we are in until it has passed, making peak and trough meaningless
-Each cycle is roughly 6 month units or 2 quarters

Expansionary (growth)

-real output in the economy is increasing and where unemployment rate is declining
-the bulk of a cycle

Peak

-real output is at its highest point
-means things can only go downhill from there

Contractionary (a.k.a. recession)

-real output in the economy is decreasing and where the unemployment rate is rising
-if a recession loses more than 10% of real GDP, then it is classified as a depression
-last about 18 months

Trough

-where you reach your lowest point of real GDP
-means the end of a recession

Step 6: Floors and ceilings are very different in economics (End of Unit 1)

Equilibrium v. Disequilibrium

Equilibrium - the point at which supply and demand intersect
-at this point resources are used efficiently

Disequilibrium - supply and demand don't intersect at all
-at this point resources are being used inefficiently

Price Ceiling v. Price Floor

Price Ceiling - Government imposed price control on how high a price can be charged for a product or service
-Protects consumers
-Below the equilibrium
-Rent Control (like in New York, NY, and San Francisco, CA)

Price Floor - Government imposed price control on how low someone can charge for a product or service
-Protects businesses

-Above the equilibrium
-Minimum wage

Where supply and demand intersect is the equilibrium. The lines above and below the equilibrium are the price floor and price ceiling, respectively.

Abbreviations useful to know when dealing with Supply

-Q                    -                    Quantity

-TR                  -                   Total Revenue

-TFC                -                   Total Fixed Cost

-TVC                -                   Total Variable Cost

-TC                   -                   Total Cost

-MC                  -                   Marginal Cost

-AFC                 -                  Average Fixed Cost

-AVC                 -                  Average Variable Cost

-ATC                  -                 Average Total Cost

Formulas useful to know when dealing with Supply

-TR = P x Q
-MR = TR(New) - TR(Old)

-MC = TC(New) - TC(Old)
-TC = TFC + TVC OR ATC/Q 
-AFC = TFC/Q
-AVC = TVC/Q
-ATC = AFC + AVC OR TC/Q

Marginal Revenue

-The additional income from selling one more unit of a good

Fixed Cost

-Does not change (fixed) no matter how much of a product is produced
-Rent/mortgage

Variable Cost

-Fluctuates, depending on how much is produced
-cellphone/electricity/gas bill

Marginal Cost

-cost of producing one more unit of a good

Step 5: No, no, not rubber band. DEmand. How elastic.

Price Elasticity of Demand

-tells how drastically buyers will cut back or increase their demand for a good when a price rises or falls

-elastic goods - wants

1. Elastic Demand - when demand changes greatly due to a change in price
   -e > 1
2. Inelastic Demand - where demand does not change, even if price does; few substitutes
   -e < 1
3. Unitary Elastic Demand - perfect, ideal situation, does not happen
   -e = 1

How to find Price Elasticity of Demand

• Find %∆ in Quantity   (New Quantity-Old Quantity)/Old Quantity = ∆ in Quantity

• Find %∆ in Price          (New Price-Old Price)/Old Price = ∆ in Price

• Compute PED              |∆ in Quantity/∆ in Price| = PED

Step 4: Demanding Supply and Supplying Demand

Demand (goes to the sand)

The quantities that people are willing to buy at various prices

The Law of Demand

There is an inverse relationship between price and quantity demanded
-P↑Q↓-P↓Q↑

A demand schedule that graphically shows the inverse relationship between P and Q

A demand curve that visually shows the inverse relationship between P and Q

What causes a "change in quantity demanded"? (∆QD)

-∆ in price

What causes a "change in demand"? (∆D)

1. ∆ in buyer's taste (advertising)
2. ∆ in number of buyers (population)
3. ∆ in income
   a) normal - goods that buyers buy more of when income rises
   b) inferior - goods that buyers buy less of when income rises
4. ∆ in price of related goods
   a) substitute goods - goods that serve roughly the same purpose to buyers
   b) complimentary goods - goods that are often consumer together
5. ∆ in expectations (future)

Supply (goes to the sky)

The quantities that producers/sellers are willing and able to produce/sell at various prices

The Law of Demand

There is a direct relationship between price and quantity supplied
-P↑Q↑
-P↓Q↓

A supply schedule that graphically shows the direct relationship between P and Q

A supply curve that visually shows the direct relationship between P and Q

What causes a "change in quantity supplied"? (∆QS)

-∆ in price

What causes a "change in demand"? (∆D)

1. ∆ in weather
2. ∆ in technology
3. ∆ in cost of production
4. ∆ in taxes or subsidies (money that the government provides)
5. ∆ in number of sellers
6. ∆ in expectations (future)

*If Demand or Supply increases, then the curve will shift to the right. If Demand or Supply decreases, then the curve will shift to the left.

Step 3: You thought. You really did. Key Assumptions.

Key Assumptions of a Production Possibilities Graph

1. Two goods are produced
2. Full Employment (FE)
   -not 100% are employed
   -not 100% productive
   -about 4% need to be unemployed
   -about 80% factory capacity is all that is in place
3. Fixed Resources - land, labor, and capital
4. Fixed State of Technology
5. No international trade

Step 2: Understanding a PPC

Factors of Production

1. Land
   -Natural Resources
2. Labor
   -Workforce - any work exerted
3. Capital
   -Physical - human-made objects used to create other goods
   -Human - knowledge and skills gained through work and education
4. Entrepreneurship
   -must be innovative and a risk-taker

Trade-offs

-alternatives given up whenever a decision is made

Opportunity Cost

-the most desirable alternative given up by choosing one course of action over another

"Guns or Butter"

-where is the government allocating our resources, military or agriculture

Production Possibilities Graph (PPC or PPF)

- shows alternative ways to use resources

• A- "underutilization" attainable, but inefficient
  Causes:
  -war
  -famine
  -recession
  -underemployment/unemployment
  -population decrease

• B- efficient, but producing more guns
• C- efficient, but producing more butter
• D- efficient and attainable
• X- unattainable at the current point in time
  Causes:
  -economic growth
  -technology
  -discovery of new resources

Step 1: How to Macroeconomics (Start of Unit 1)

Macroeconomics v. Microeconomics

What is Macroeconomics?

• Studies the whole economy 
• -GDP (gross domestic product)
  -unemployment

What is Microeconomics?

• Studies the specific parts of the economy; like how households and firms make decisions an how they interact in markets
  -Supply and Demand
  -Market Structure

Positive Economics v. Normative Economics

• Positive Economics - claims that attempt to describe the world as is, very descriptive
  -Minimum wage laws cause unemployment due to inflation
• Normative Economics - claims that attempt to prescribe how the world should be
  -Governments should raise minimum wage to benefit the people

Needs v. Wants

• Needs - basic requirements for survival
  - Shelter
  -Food
  -Water
• Wants - desires of citizens; much broader than your needs
  -The newest trends
  -The biggest house
  -The most expensive cars

Scarcity v. Shortage

• Scarcity - the most fundamental economic problem that all societies face; trying to satisfy unlimited wants with limited resources
  -Permanent
• Shortage - a situation where the quality demanded exceeds the quality supplied
  -in short, QD>QS
  -Temporary

Goods v. Services

• Goods - tangible commodities that can be bought, sold, traded, or produced
  -There are two types of goods: consumer and capital goods
  -Consumer goods - goods that are intended for final use by the consumer, i.e. a vehicle or candy bar
  -Capital goods - items used in the creation of another good, i.e. machinery or cooking ingredients
• Services - work that is performed for another