GDP GAP

- It is the amount by which actual GDP falls short of potential GDP.

Okun's Law

- It states for every 1% that actual employment rate exceeds the natural rate of unemployment (NRU), a GDP gap of 2% occurs.
- Example: In mexico, the unemployment rate is 7.4%, the natural of employment is 6%. 2(7.4 - 6) =     2.8%.

Rule of 70

- It is used to determine how many years it take for a value to double given a particular annual growth   rate.
- Example: If you put $20,000 in the bank and it earns a yearly interest rate of 7%, then how many years will it take for your income to double.
- Formula: (70/ # of years).

UNEMPLOYMENT

- Failure to use available resources particularly labor to produce desired goods and services.

Unemployment Rate

- Ideal unemployment rate is (4-5%) which means full employment or natural rate of unemployment   (NRU).

Labor Force

- Above 16 years old.
- Able and willing to work.

Not in the Labor Force

- Military.
- Jail/ Prison.
- Mental institutions.
- Retired People.
- Students.
- Homemakers.
- People who are not looking for a job.

How to Calculate Unemployment

- (# of unemployed people/ # of employed people + # of unemployed people) 100.

Types Of Unemployment

Frictional

- Temporarily unemployed or in between jobs.
- Recent high school graduate.
- Better position.

Structural

- Workers do not have transferable skills and these jobs will never come back.

Seasonal

- Unemployment due to the time of the year and nature of the job.
- Bus drivers, Santa Claus impersonator.

Cyclical

- Results from economic downturns.
- As demand for goods and services fall, demand for labor also fall.
- Full employment means no cyclical employment.

INFLATION

- It taxes those who receive relatively fixed income.

Unanticipated Inflation

Hurt by Inflation

- Lenders (lend money at a fixed rate).
- People with a fixed income (elderly and welfare consumers).
- Savers (those who save money at a certain rate).

Helped by Inflation

- Debtors.
- A business where the price of the product increases faster than the price of resources.

REAL VS NOMINAL GDP

Real GDP

- The value of output produces in constant base year prices. 

- It can increase if quantity increase. 

- We use real GDP to measure economic growth.

Nominal GDP

- The value of output produced in current prices. 

- It can increase from year to year if price and quantity increase. 

- It is used to measure inflation.

GDP Deflator

- It is a price index used to adjust from nominal to real GDP.

- Formula: (Nominal GDP/Real GDP) 100.

Consumer Price Index (CPI)

- It is the most commonly used measurement of inflation for consumers.

- Formula; (Current year/ Base year) 100.

Calculation For Inflation

- Formula: (GDP Deflator of current year - GDP Deflator/ GDP Deflator) 100.

Real Interest Rate

- Adjusted for inflation.

- Formula = Nominal interest rate - Inflation.

Nominal Interest Rate

- Not adjusted for inflation. 

WAYS OF CALCULATING GDP

Expenditure Approach

- We add up all of the spending on final goods and services produced in a given year.

- Formula: GDP= C+IG+G+XN.

Income Approach 

- We add up all of the income that resulted from selling all final goods and services produced in a          given year.

- Formula: GDP= N+R+I+P+Statistical adjustments.

* Compensation of Employees: It includes wages, salaries, franking benefits, social security contribution, health and pension plans.

* Rents: income of property owners.

* Interests: income that comes from money.

* Corporate Profits: income of company stockholders.

* Proprietor's Income: income from sole proprietorship and partnerships.

* Statistical Adjustments:

   - Indirect Business Taxes.

   - Depreciation.

   - Net Foreign Factored Payment.

- Rarely used because people lie about their age.

NET DOMESTIC PRODUCT (NDP)

GDP - depreciation (consumption of fixed capital).

NET NATIONAL PRODUCT (NNP)

GNP= GDP + net foreign factored payment.

Budget Surplus/ Deficit

- Formula: government purchase of goods and services + government transfer payment - government   tax and fee collection.
- Surplus (-) and Deficit (+).

Trade Surplus/ Deficit

- Formula: export - import.

National Income

- Formula: compensation of employees + rental income + interest income + corporate profits + proprietor's income.

                                                   OR

- Formula: GDP - indirect business tax - depreciation - net factored payment.

Disposable Personal Income

- Formula: national income - personal household taxes + government transfer payment.

GDP/GNP

GDP

- This is the market value of all final goods and services within a country's border within a given year.

GNP

- It is the total value of all final goods and services by citizens of that country on its land or a foreign and.

INCLUDED IN GDP:

C- Personal consumption expenditures (65%).
IG- Gross private domestic investment (17%).
      * Factory equipment, factory equipment maintenance, construction of housing, unsold inventory of                    products built in a year.
G- Government spending (20%).
XN- Net exports (-2%).
        * (Exports - Imports).
Formula: C+IG+G+XN.

WHAT'S NOT INCLUDED IN GDP.

1) Intermediate Goods: goods that require further processing before they are ready for final use
    * Parts of a car.
2) Used/ Secondhand Goods.
    * To avoid double counting.
3) Purely Financial Transactions(stocks and bonds).
4) Illegal Activities(drugs).
5) Unreported Business Activity(unreported tips).
6) Transferred Payments.
     * Public(social security, welfare, VA).
     * Private (scholarship, trust funds).
7) Non-Market Activity.
     * Volunteer work, babysitting, any work performed for self.

CIRCULAR FLOW DIAGRAM

- It represents the transactions in an economy.

Resource (Product) Market

- This is the place where households sell resources and businesses buy resources(goods and services).

Factor Market

- This holds the factors of production(land, labor, capital and entrepreneurship).

Firms

- It is an organization that produces goods and services for sale.

- Firms sell finished products to households.

Household

- It is a person or a group of people that share their income. Households sell their factors of production to businesses.

BUSINESS CYCLE

Peak

- It is the highest point of real GDP. This is where we have the greatest spending and lowest unemployment. In this phase, inflation is a problem.

Expansion

- This is where real GDP is increasing, spending increases and unemployment decreases.

Contraction/Recession

- This is where real GDP declines for 6 months. This is also where we have increased unemployment and decline in spending.

Trough

- This is the lowest point of real GDP. It has the highest unemployment and the least spending.