So I didn't study for this unit AT ALL

U2 M10

The Product Market: “place” where goods and services produced by businesses are sold to households
Resource (factor) market: “place” where resources are sold to businesses
private sector: part of the economy run by individuals/businesses
public sector: part of the economy controlled by gov
facctor payments: payments for factor production (rent, wages, interest, profit)
transfer payments: when gov redistributes income (welfare, social security)
subsidies: government payments to businesses

Government borrowing primarily occurs when gov issues bonds that are purchased by either lage banks, foreign countries, or individuals

Households own resources and sell said resources to businesses in the resource market

total value of all final goods and services produced in 1 year
Intermediate goods, used goods, financial assets and bonds, and foreign produced goods/services are NOT included
GDP = C + I + G + X - IM
- Consumer spending
- investment spending
- government purchases of goods and services
- exports
- imports
GDP = labor income + rental income + interest income + profit
- (factor paryments)

GDP measures how well country is doing financially
GDP does not itself accurately measure stasndard of living → must be adjusted to reflect nation’s population size → GDP per capita
- best measure of a nation’s standard of living
Reasons for some countries having higher GDPs than others
- economic systems (capitalism better)
- property rights
- capital (machinery, tools, man-made resources)
- human capital (knowledge)
- natural resources (low = low GDP)
illegal activities (drugs + black markets) not part of GDP
stock market profits are not counted towards GDP
social security (welfare programs) are not counted because → DON’T COUNT TOWARDS PRODUCTION
If citizens of one nation are working abroad, the profits they generate are NOT counted in their home nation’s GDP, rather its counted in the nation in which they are working in
GDP calculations include all factor payments: rent, wages, interest, and profits

Nominal GDP is GDP in current prices
Real GDP is expressed in constant unchanging dollars (calced using a base year)
- best measure of econ growth

unemployment: workers actively looking for a job but aren’t working
unemployment rate; percent of people in the labor force who want a job but are not working
Types of unemployment
- frictional
  - temporary unemployment or being between jobs (qualified workers with transferrable skills)
  - seasonal unemployment is a special type of frictional unemployment due to time or year and the nature of the job
- structural
  - changes in the labor force → some skills obsolete
  - more people looking for jobs than are available at current wage
  - these workers DO NOT have transferable skills and these jobs will NOT come back
    - this permanent loss is called “creative destruction”
- cyclical
  - unemployment caused from a recession
    - demand for goods and services falls, demand for labor falls and workers are fired
natural rate of unemployment
- f unmeployment and s unemployment present @ all times bc people will always be betwn jobs or replaced by tech
- economy is going good if there’s only f and s unemployment (natural)
  - cyclical unemployment moves country away from NRU
Full Employment Output (Y) real gdp created when no cyclical unemployment
Longer + greater unemployment benefits → reduce incentives to search for job → increase NRU

Inflation is rising general level of prices and reduces the “purchasing power” of money
- rampant inflation is bad bc banks don’t lend and people don’t save → decreases investment + GDP
Deflation - decrease in general prices (negative inflation rate)
- bad because people will hoard money + financial assets → decrease consumer spending + GDP
Disinflation - prices increasing @ slower rates

Hurt by Inflation
- lenders (people who lend money @ fixed interest rates
- people w fixed incomes
- savers
Helped by inflation
- borrowers (people who borrow money)
- a business where the price of the product increases faster than the price of the resources

How is inflation measured?
1. The inflation rate: % change in prices year to year
2. Price indices: index numbers assigned to each year to show how prices have changed relative to a specific base year.

CPI (measurement of inflation for consumers)
- base year given index of 100
- each year is given an index # as well
Problems w CPI
- substitution bias: as prices increase for fixed market basket consumers buy less of these products and more substitutes that may not be part of the market basket (CPI may be higher than what consumers are really paying)
- new products: CPI market basket may not include the newest consumer products (CPI measures prices but not the increase in choices)
- product quality: CPI ignores both improvements and decline in product quality (CPI may suggest prices stay the same though economic well being has changed signifcantly)

GDP deflator
- measures prices of ALL GOODS PRODUCED, whereas CPI only measures prices of goods and services bought by consumers
nominal/real * 100

Causes of Inflation
- too much money being printed
- MV = PY
  - M is money supply
  - V = velocity = avg times a dolla ris spent and re-spent in a year

Real INterest Rates: % increase in purchasing power that a borrower pays
- real = nominal interest rate - expected inflation
- rearranged for nominal