Unit 2 Notes

- Gross Domestic Product-  Total dollar value of all final goods and services produced within a countries  borders within a given year 

- Gross national product- total value of all final goods and services produced by americans in a year 

- GDP Equation = C + Ig+ G + X 

- Gross Domestic Product 

- C: Consumption  

- Ig: Gross Private Domestic Investment 

- G: Government spending 

- Xn: Exports-imports 

- Expenditure approach  

• Add up the market value of all domestic expenditures made on final foods and services in a single year 
• C+Ig+G+Xn 

- Income approach 

• Adding up all the incomes earned by households and firms in a single year 
• W+R+I+P+Statistical adjustments 
• W: Wages 
• R: Rents  
• I: Interest 
• P: Profit 

- Budget 

• Government purchases of good + services + govt transfer payments - govt tax and fee collection 
• If it is a positive number, it is a deficit  
• If it is a negative number, it is a surplus 

- Trade 

• Exports- Imports 

- GNP 

• GDP+ net foreign factor payment 

- NNP: net national product 

• GNP- depreciation 

- NDP 

• GDP - depreciation 

- National income 

•  GDP- Indirect business taxes - depreciation - net foreign factor payment  
• Compensation of employees + proprietors income + rental income + interest income  + corporate profits  

- Disposable personal income  

• national income - personal household taxes + gov. transfer payments 

- Nominal GDP 

• Def: Value of output produced in current prices  
• P x Q 
• Can increase from year to year if either output or price increase 

- Real GDP 

• Def: Value of output produced in constant or based year prices  
• Adjusted for inflation  
• P x Q  
• Can increase from year to year only if output increases  

- Price index 

• Def: measure inflation by tracking changes in the price of a market basket of goods compared to the base year 
• price of market basket of goods in current year / price of market basket of goods in base year  

- GDP deflator 

• A price index that is used to adjust nominal GDP to real GDP 
• In the base year the GDP deflator is
• = 100  for years after base year  
• = >100 For years before the base year  
• = <100 (Nomial GDP/ Real GDP)  ×100 

- Inflation 

• (New GDP Deflator - Old GDP Deflator / Old GDP Deflator ) ×100 

- Inflation  

• Rise in the general level of prices 
• Standard inflation rate 2 to 3 percent  

- Measuring Inflation 

• Inflation rate: measures the percentage increase in the price level over time  
• Key indicator of an economy's strength  
• A decline in the general price level

- Disinflation 

• It occurs when the inflation rate itself declines  

- Consumer Price Index 

• Measures inflation by tracking the yearly price of a fixed basket of consumer goods and services  
• Indicates changes in the price level and cost of living  

- Solving inflation problems 

• Finding inflation rate by using market basket data 
• (current year market basket value - base year market basket value / base year market basket value ) x 100  

- Finding inflation rate using price index 

• (current year price index - base year price index / base year  price index )x 100 

- Estimating inflation using the rule of 70 

• Used to calculate the number of years it will take for the price level to double at any give rate of inflation 
• Years needed to double inflation = 70/ annual inflation rate  

- Real wages  

• (nominal wages / price level ) ×100  

- Finding real interest rates 

•  nominal interest rate - inflation premium  

- Cost of borrowing or lending money that is adjusted for expected inflation 

• Nominal interest rate 
• Unadjusted cost of borrowing or lending money  

- Demand pull inflation 

• Caused by excess of demand / output that pulls prices upwards 

- Cost pushed inflation 

• Caused by a rise in per unit production cost due to increasing resource cost  
• Borrowers 
• Fixed Contract 

- Inflation Hurts... 

• Fixed income 
• Savers 
• Lenders / creditors