*command (centrally planned)
-command owns capital and land; command controls labor
-ex) Cuba
*traditional
-based on habits, rituals and customs
-most decisions are made by elders
-discourage new ideas and technology
-ex) tribes
*free market
-people and firms act in their own best interest
-buyers and sellers exchange goods and services in a free economy
-ex) Hong Kong
*mixed
-businesses are regulated by the government to protect the public's interest
-ex) US, Canada, Mexico
Three Economic Questions
*1. What goods and services should be produced?
*2. How should these goods and services be produced?
*3. Who will consume these goods and services
Market
*an institution that allows buyers and sellers to trade
*Product vs. Factor Market
-Product market
>buyer is usually a consumer and the seller is usually a firm
-Factor market (also known as "resource market")
>the buyer is usually the firm and the seller is usually a factory owner
*Household vs. Firm
-Household
>a person or group of people that share their income
-Firm
>an organization that produces goods and services for sale
Gross Domestic Product (GDP)
*total value of all final goods and services produced in the US in a given year
*it includes all production or income earned within the US by US or foreign producers
*it does not include production by non-Americans even in the US
*formula for GDP [Expenditure vs Income approach]
-expenditure approach = C + Ig + G + Xn
>it is income generated from production of goods and services
>C : personal consumption
~purchases of finished goods and services
>Ig : gross private domestic investment
~new factory equipment
~construction of housing
~factory equipment maintenance
~unsold inventory of products built in a year
>G : government spending
~government purchases of goods and services
>Xn : net exports
~exports - imports
-income approach = W + R + I + P + statistical adjustments
>W : wages
>R : rents
>I : interest
>P : profits
-Items that do not count in the GDP
>used goods
>gifts (a transfer)
>stocks and bonds
>unreported business activities
~ex) waiter's tips
>illegal activities
>financial transaction between banks and businesses
>intermediate goods
>unmarked activities
~ex) babysitting
Gross National Product (GNP)
*total value of all final goods and services produced by Americans in a year
*includes production or income by Americans anywhere in the world
*does not include production by non-Americans even in the US
*GNP = GDP + net foreign factor payment
Net Domestic Product (NDP)
*GDP adjusted for depreciation
*NDP = GDP - depreciation
-depreciation : consumption of fixed capital
National Income (NI)
*income earned by American owned resources whether it is here or aboard
*NI = NNP - IBI
-NNP : net national product
>NNP = GNP - depreciation
-IBI : indirect business taxes
*NI is also equal to GDP - IBI - depreciation - net foreign factor payment
and CE + RI + II + CP + PI
-CE : compensation of employees
-RI : rent income
-II : interest income
-PI : proprietor's income
Disposable Personal Income (DPI)
*after tax income available for household consumption
*DPI = NI - HT + GTP
-HT : household taxes
-GTP : government transfer payment
Trade
*export - import
-if net export is positive, there is a trade surplus
-if net export is negative, there is a trade deficit
Nominal GDP
*it measures GDP in current dollars no matter what the output is
*Nominal GDP = P x Q
-P : price
-Q : quantity
Real GDP
*it measures GDP in constant dollars and is adjusted for inflation
*Real GDP = P(of base year) x Q
GDP Deflator
*the measure of the level of prices of all new domestically produced final goods and services in an economy
*GDP deflator = (nominal GDP / real GDP) x 100
Inflation rate
*rise in general level of prices
*[ (price index in year 2 - price index in year 1) / price index in year 1 ] x 100
Consumer Price Index (CPI)
*most widely used measure of the overall price level in the US
*(price of the market basket in the particular year / prices of the same market basket in other year) x 100
Inflation
*rise in general level of prices
*ex) a dollar today might buy less tomorrow
Deflation
*a decline in the general level or prices
Solving Inflation Problems
*rule of 70
-how many years will it take to double inflation
-70 / growth rate
*inflation rate = (new price index - old price index) / old price index
Finding Real Interest Rates
*real interest rate = nominal interest rate - inflation
*2 to 3% inflation is ideal
*it is the cost of borrowing or lending money that is adjusted for expected inflation
Nominal Interest Rate
*it is an unadjusted cost of borrowing or lending money
Causes of Inflation
*demand-pull
-it is caused by an excess of demand over output that pulls prices upward
-output and employment rise while the price level is also rising
-spending increases faster than production
-it causes :
>increase in government purchase
>excessive increases in money supply (creates a condition called hyperinflation)
~hyperinflation : rapid rise in inflation rate
>rising income as economy approaches full employment output
*cost-push
-caused by rise in per unit production cost due to increasing resource cost
-two sources of this
>supply shocks : dramatic rise in energy or raw material prices due to input shortages or growing
demand in inputs
>price wage spiral : where workers seek higher wages to offset rising consumer prices
Effects of Inflation
*anticipated vs. unanticipated inflation
-anticipated inflation
>has stronger effects because those expecting inflation may be able to adjust their work or
spending habits to avoid or lessen the effect
-wages and pension
>may have cost of living adjustments (cola) built in to offset anticipated inflation
*people who are hurt or helped
-fixed income
>they will be hurt because their real income suffers; their nominal income does not rise with prices
-savers
>hurt by unanticipated inflation because inflation takes away from the interest earned from the account
-lenders
>hurt by unanticipated inflation because debt is repaid with cheaper dollars
-borrowers
>helped because they can pay their debt with cheaper dollars
Unemployment
*failure to use available resources
*types of unemployment :
-frictional
>temporary, transitional, short-termed, searching for a job or in between a job
>ex) graduates in high school or college, people who quit or is fired, people looking for a better job
>signals that new jobs are available and reflects freedom of choice
-cyclical
>economic downturn in business cycle, different demand for goods and services
>caused by recession (if you lose a job due to recession, that job can come back)
-structural
>deals with technology
>caused by automating (means job can be obsolete due to changes in consumer's taste)
>also caused by creative destruction (as jobs are created, others are lost)
>another cause is change in skills
-seasonal
>jobs that depend on season or weather
>ex) lifeguards, Santa Claus, Easter bunny, construction workers
*unemployment rate = (number of unemployed / total labor force) x 100
-4 to 6% is standard unemployment rate
*employed
-includes those that are self-employed
*unemployed
-new entrants
-re-entrants
-laid off
-lost last job
-quit last job
*not in labor force
-armed services
-homemakers
-students
-retirees
-disabled people
-people in mental institutions
-people in prison
Full Employment (FE)
*natural rate of unemployment (NRU)
*it is equal to structural and frictional unemployment
*full employment does not mean zero unemployment
Okun's law
*describes how unemployment relates to a nation's GDP
*states that for every 1% unemployment above NRU, a negative GDP gap of 2% will occur
Unequal burdens of unemployment
*rates are lower for white-collar workers
*teenagers have the highest rates
*blacks have higher rates than whites
*rates for males and females are comparable
