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NIA
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(National income accounting) measures economy's overall performance
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When is performance usually measured by businesses?
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Quarterly. (Every 3 months). Gives managers an idea of what direction to take company in terms of strategy
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GDP (gross domestic product)
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The primary measure of a country's economic performance is it aggregate output. (total output of finished goods and services that a given year.)
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What is aggregate output?
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Aggregate output includes all goods and services employed by domestic and foreign resources with in the USA. Only includes final goods, not intermediate goods, to avoid multiple accounting. Final goods and services are not for resale or further processing
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Non-production transactions
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Excluded from GDP as they have nothing to do with the production of final goods.
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What are the four non-production transactions?
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1.Public transfer payments
2. Private transfer payments
3. Stock market transactions
4. Second-hand sales
2. Private transfer payments
3. Stock market transactions
4. Second-hand sales
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Public transfer payments
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Social Security, welfare, veterans payments
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Private transfer payments
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Private gifts between citizens
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Stock market transactions
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Only involves paper. Services for a broker are included in GDP
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Second-hand sales
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Used cars, thrift shops, craigslist, etc.
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Macroeconomic goals
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Price stability, maximize employment, economic growth (PEG)
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Price stability
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Occurs when the average level of prices in economy is neither increasing nor decreasing, the goal of price stability does not imply that prices of individual items should not change, only that the average level of prices should not. I get that inflation rate to 0%. CPI measures the price level, and allows us to determine the inflation rate. CPI one of many price level measures
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Inflation
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A sustained rise in the average level of prices
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Deflation
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A sustained decline in the average level of prices
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Maximize employment (full employment)
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Also called the natural level of employment. Exist with most individuals were willing to work at the prevailing wage is in the economy on Floyd and the average price level is stable. There will be some frictional and structural unemployment. Target 4% unemployment rate
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Frictional unemployment
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Temporary unemployment from Workers changing jobs and new workers seeking their first jobs
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Structural unemployment
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Mismatch between the skills of the people seeking jobs in the skills required for available jobs
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Economic growth
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Occurs when the con of me produces increasing amounts of goods and services over the long term. If the increase is greater than the increase in population, the amount of goods and services available per person will rise and thus the nations standard of living will improve. Real GDP better measure than nominal GDP, As real GDP adjust for inflation. Economic growth refers to long run economic growth.
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Long-run economic growth
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Changes in the productive capacity of the economy through changes in plant, equipment, and technology
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2 types of inflation
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1.Demand pull inflation
2.cost push inflation
2.cost push inflation
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Demand pull inflation
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Too many dollars choosing goods and services
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Cost push inflation
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Cost prices are going up because resources prices are going up
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Income approach
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Income approach= wages + rents + interest + profits + statistical adjustments
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Expenditures approach
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Expenditures approach= C + I + G + Nx
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"C"
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Consumption expenditures per household. Durables and nondurables are included, as our services
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"I"
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Gross investment expenditures by business. Machinery, tools, equipment, and construction for business, and inventories. Only new capital assets. Not real estate or stocks and bonds, which I'm really transfers of existing assets
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Capital assests
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Create jobs and income
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"G"
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Government purchases of goods and services
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"Nx"
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Expenditures by foreigners (imports-exports)
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Equation for net domestic product (NDP)
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NDP = GDP - consumption of fixed capital (Depreciation)
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Equation for national income (N)
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N= NI - social security contributions - corporate income taxes
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Personal income (P) equation
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NI- social security contributions- corporate income taxes - undistributed corporate profits- transfer payments
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Equation for disposable income (DI)
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Personal income- personal taxes
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Shortcomings of GDP
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Exclusion exclusion of non-market activities ( homemakers, self repairs, etc.) leisure, product quality improvements, the black market, environmental quality, the distribution of output, and general well-being of society
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Employment act of 1946
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Passed by Congress after World War II. Stated that it was the policy and responsibility of federal government to use all practical means to promote maximum employment, production, and purchasing power. Established three important goals for the economy
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Three goals of the employment act of 1946
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1. Full employment
2. Price stability
3. Economic growth
2. Price stability
3. Economic growth
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What is per capita
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Per person
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Full employment and balanced growth act of 1978 (Humphrey- Hawkins act)
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Stop list two additional goals: an unemployment rate of 4% with a 0% inflation rate
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Unemployment rate (UR) equation
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UR = number of unemployed/ labor force x 100
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Labor force participation rate (LFPR) equation
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LFPR= number in labor force/ adult population x 100
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Price index
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Measure price changes in the economy. By using price index, you can combine the prices of a number of goods and or services and express and one number of the average change for all the prices
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Consumer price index (CPI)
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The measure of price changes that is probably most for familiar to people. It measures changes in the prices of goods and services commonly bought by consumers. Items that consumers spend more money on, such as food, are given more weight or importance in computing the index 10 items such as newspapers, magazines, and books, on which the average consumer spends comparatively less
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Market basket
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Index is based on this market. Approximately 400, or about 200 today, goods and services waited according to how much the average consumer spent in the base year.
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Producer price index
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Measures changes in the prices of consumer goods before they reach the retail level, as well as the prices of supplies and equipment businesses buy
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The gross domestic product price deflator
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The most inclusive index available because it takes into account all the goods and services produced.
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Constructing price index
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Economist select a previous period, Usually one year, to serve as the base period. The prices of any subsequent. I expressed as a percentage of the base Period. for convenience, the base period Of almost all indexes is set at 100
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CPI
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CPI= weighted cost of the base- period items in current- year prices / weighted cost of base-period items in base-year prices x 100
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Why do we multiply by 100?
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To express the index relative to the figure of 100 for the base period
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What does CPI use?
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Nominal prices
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Price change
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Rate of change in this index is determined by looking at the percentage change from one year to the next
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Price change equation
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Price change = change in CPI / beginning CPI x 100
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Short- run economic growth
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To measure fluctuations in output, or short run economic growth, Measure increases in the quantity of goods and services produced in the economy from quarter to quarter or year to year. GDP commonly used.
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Formula for computing GDP in a given year
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Real GDP in year 1= (nominal GDP x 100) / price index
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Equation to compute output growth in GDP from one year to another
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Output growth= (real GDP in year 2 - real GDP in year 1) / real GDP in year 1 x 100
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GDP per capita
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Used to understand the impact of output changes. Divide the real GDP of any period By a countries average population during the same period. Enables us to determine how much of the output growth of a country simply went to supply that increase in population and how much of the growth for presented improvements in the standard of living of the entire population.
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Real GDP per capita equation
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Real GDP per capita = year 1 real GDP / population in year 1
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GDP = CIGXn
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C- if the item is counted as consumption spending
I- if the item is counted as investment spending
G- government spending
Nx- net exports
I- if the item is counted as investment spending
G- government spending
Nx- net exports
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Why do we only count the final retail price of a new good or service in the GDP
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Because multiple accounting
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Purely financial transaction will not be counted in the GDP. Why?
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Because it's only money being moved, not affecting companies. No good or service.
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When A homeowner does home-improvement work, the value of the labor is not counted in the GDP. Why?
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Because the GDP includes businesses and the homeowner is not getting paid. No transfer of money for a goods/services
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Index number equation
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Index number= Current year cost / base year cost x 100
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Why do we multiply by 100?
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Supplying by 100 converts the number so it is comparable to the base your number. The base year always has an index number of 100 since the current year cost and the base year cost of the market basket are the same in the base year
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How do you know if the quality of the product changes for the better? For the worse?
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Personal preference
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Why would the price index number computed above not be accurate if the quality of goods in the Basic market basket changed?
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Quality does not affect the price index
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When would the price index number be a cost of living index
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Just to be a major expenditure and it's not every single number
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What conclusions can you draw about who is helped and who is hurt by unanticipated inflation?
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Borrowers gain from inflation. People who loan may be hurt depending on the inflation and if it's adjustable or fixed rate.
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If you are certain that the inflation rate would be 10% a year for the next 10 years, how might your behavior change? Does your answer still depend on who you are? Student? Worker?
answer
It would be a fixed rate for 10 years. Therefore this could benefit you if you were. Saying a monthly fee, if the money inflation is making the money worth less common thing you could be painless. Get a loan before.
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