Four economic questions
- Why do I comes grow?
- Why do incomes fluctuate?
- What determines inflation?
- Why is there unemployment?
Principles of how individuals interact
- trade makes everyone better off
- markets are usually a good way to organize economic activity
- governments can sometimes improve market outcomes
Difference between GDP and GNP
GDP- market value of all final goods produced domestically during a period of time
GNP- all goods produced by Americans at home and abroad
GNP = GDP - net factor payments
Fundamental Identity of national income accounting
Total production = total income = total expenditure
National income expenditure identity
Y = C + I + G + NX
Nominal vs Real GDP
-nominal is not adjusted for inflation
GDP Deflator
GDP deflator (c,i,g,nx) = (nominal gdp / real gdp) x 100
CPI formula
CPI = (price of basket in current year/price of basket in base year)100
Three main price indices
- CPI
- PCE (used by Fed)
- gdp deflator
Interest rate formula thing
Real interest rate = nominal interest rate - inflation rate
Labor force equation
Labor force = number of unemployed + number of employed
Unemployment rate formula
Unemployment rate = (# of unemployed / labor force)100
Labor force participation rate formula
Labor force participation rate = (labor force/adult population)
Adult population formula
Adult population = labor force + those over or equal to 16 not participating in the labor force
Employment population ration
Number of employed/adult population
Natural rate of unemployment revolves around
Structural and frictional unemployment
Structural unemployment
Fewer jobs than workers; skills become obsolete; generally long term
Caused by:
- minimum wage laws
- unions
- efficiency wages
Cyclical unemployment
Deviation from the natural rate of unemployment; associated with the business cycle
Productivity equation
Productivity = Y/L
Output/unit of labor input
Productivity determinants
- K= physical capital
- K/L= physical capital/worker
- H= human capital
- H/L= human capital/worker
- N= natural resources
- N/L= natural resources/worker
- A= level of technology
Production function
Y = A F(L,K,H,N)
this function has CRTS
Cobb’s production function
Y = A K^a L^(1-a)
a= share of capital
In a closed economy…
Think in terms of savings and investment
NX=0
S=I
Disposable income formula
Y-T
