Unemployment

 Unemployment 

The failure to use available resources, particularly labor, to produce desired goods and services

Unemployment rate: 4-5%

• full employment or natural rate of unemployment (NRU)

Labor force: 

• above 16 years of age
• able & willing to work 

Not in labor force:

• military
• jail/prison
• mental institutions
• retirees 
• under 16
• homemakers
• people not looking for a job

How to calculate unemployment rate:

Number of unemployed people/ the number of employed +the number of unemployed *100

Types of unemployment 

• frictional: temporarily unemployed/ in between jobs (possibly a high school or college graduate looking for a job, left Jon for a better position)
• structural: workers do not have transferable skills and these jobs will never come back (vcr repair)
• seasonal: due to time of the year and nature of the job (bus drivers, Santa Claus impersonator, lifeguards, construction) 
• cyclical: results from economic downturns/ as demand for goods and services fall, demand for labor and workers also fall (recession)

*Full employment means no cyclical unemployment 

GDP gap

The amount by which actual GDP falls short of potential GDP 

Okun's Law

For every 1% that actual unemployment rate exceeds the natural rate of unemployment, a GDP gap of about 2% occurs 

• In Mexico the unemployment rate is  7.4%. The natural rate of unemployment in Mexico is 6%, find the GDP gap.

Rule of 70

Used to determine how many years it takes for a value to double given a particular annual growth rate.

• If you put $20,000 in the bank, and it earned a yearly interest rate of 7%, then how many years will it take for you income to double ? 
• 70/ interest rate 
• 70/7=10 years

Inflation

Hurt by inflation: 

• lenders(lend at fixed interest rate)
• people with fixed income(elderly/welfare)
• savers(save money at certain rate

Helped:

• debtors(owe money)
• A business where the price of the product increases faster than the price of resources 

Cost of Living Adjustment (COLA):

• Received by the elderly; social security

GDP Calculations

Real GDP-the value of output produced in constant base year prices (can only increase if quantity increases) used to measure comic growth 

Nominal GDP-the value of output produced in current prices (it can increase from year to year if price and quantity increase) used to measure price increases (inflation)

GDP deflator- a price index used to adjust from nominal to real GDP=nominal GDP/ real GDP*100

Consumer price index(CPI)- the most commonly used measurement of inflation for consumers =current year/base year *100

Inflation- taxes those who receive relatively fixed income 

GDP deflator of current year-GDP deflator of base year/base year*100 

In the base year, GDP deflator=100

For years after the base year, GDP deflator is greater than 100

For years before the base year, GDP is less than 100

Real interest rate- adjusted for inflation (nominal interest rate-inflation)

Nominal interest rate- not adjusted for inflation 

Gross Domestic Product

GDP 

The market value of all final goods and services produced within a country's borders within a given year 

Also included production made in the US by a foreign company

GNP

Total value of all final goods and services by citizens of that country on its land or foreign land 

What's included in GDP?

C- Personal consumption expenditures (65% of GDP spent here/ groceries, clothes, miscellaneous)

Ig- gross private domestic investment ( 17% spent here/ factory equipment, factory equipment maintenance, construction of housing, unsold inventory of products built in a year)

G- Government spending (20%/ goods and services)

X_n- net exports (-2%/ exports-imports)

C+Ig+G+Xn= GDP 

What's not included in GDP?

1. Intermediate goods: goods that require further processing before they are ready for final use
2. Used/ second hand goods-trying to avoid double counting
3. Purely financial transactions: stocks and bonds 
4. Illegal activities: drugs 
5. Unreported business activity: unreported tips
6. Transfer payments- public(social security, welfare, VA) and private(scholarship)
7. Non-market activity: volunteer work, babysitting, work performed yourself 

Two ways of calculating GDP:

1. The expenditure(spend) approach- add up all the spending on final goods and services produced in a given year (GDP=C+Ig+G+X_n)
2. Income approach- add up all the income that resulted from selling all final goods and services produced in a given year (WRIP+ statistical adjustments)

Expenditure approach= income approach 

Compensation of employees: includes wages, salaries, fringe benefits, social security contributions, health and pension plans 

Rents: income of property owners

Interest: income that comes from money 

Corporate profits: the income of the company stockholders 

Proprietor's income: the income of sole proprietorship and partnerships

Statistical adjustments: indirect business taxes, depreciation, net foreign factor payment  

Net domestic product (NDP)=GDP-depreciation(consumption of fixed capital)

Net national product (NNP)=GNP-depreciation

GNP=GDP+net foreign factor payment 

Circular Flow Diagram

Circular flow diagram: Represents the transactions in an economy 

Product market: this is the place where households sell resources and businesses buy resources 

• goods and services

Factor market: holds factors of production 

Firms: an organization that produces goods and services for sale 

• sell finished products to households

Household: person or group of people that share their income 

• sell their factors of production to businesses