C + Ig + G + Xn [X-M] C + Ig + G + Xn [X-M] = GDP GDP – Depreciation = [what is for sale] NDP NDP – NFFIEUS –I ndirect B usiness Taxes = NI UCST NI –U ndis C orp P rofits –C orp I nc T axes -S oc S ecur +TP = PIspend, save, or pay in taxes [ PI is what you can spend, save, or pay in taxes ] PI – Personal Income Taxes = DIspend or save [ DI is what you can spend or save ] [“Replacement capital”] [GDP and its four cousins] National Income Accounting

Answers to “Is It Counted in GDP?”

C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic ProductGDP Gross Domestic Product (GDP) - Consumption of fixed capital Net Domestic ProductNDP Net Domestic Product (NDP) N - Net For. Factor Inc. Earn. U.S. I -Indirect business taxes National IncomeNI National Income (NI) - U - Undistributed Corporate Profits -C -Corporate income taxes -S -Social Security Contributions +T +Transfer payments Personal IncomePI Personal Income (PI) - Personal Taxes Disposable IncomeDI Disposable Income (DI) ______ $_ _____ ______$_______ $_ _____ ______ _______ $_ ______ ________ $ _______ NIA Practice – “How To Do It” Personal taxes 403-U ndistributed corp. profits 46 Personal taxes 403-U ndistributed corp. profits 46 Imports 362-Social Security contrib.169 Imports 362-Social Security contrib.169 +Transfer payments 283Personal consumption 2,316 +Transfer payments 283Personal consumption 2,316 -C orporate I ncome T axes 88Gross private domes invest C orporate I ncome T axes 88Gross private domes invest. 503 Indirect business taxes 231Government purchases 673 Indirect business taxes 231Government purchases 673 Exports 465Depreciation [Capital consumption] 307 Exports 465Depreciation [Capital consumption] 307 N.F.F.I.E. in the U.S. 12 $112 NFFI = $12 2, , , , , ,622 ROW $ 100 I’m going through an academic recession. Report Card Report Card English C Accounting C American History D Economics F

Positive Net Investment [Ig>D] Net Investment Gross Investment Depreciation - = Stock of Capital Consumption and Government Spending Stock of Capital Depreciation Net Investment January 1 Year’s GDP December 31 Increased Gross Investment [increasing product. capac.]

Nominal [money] GDP v. Real GDP increase in pricesoutput An increase in prices and/or output will increase nominal GDP. increase in output will increase real GDP Only an increase in output will increase real GDP. Nominal GDP could increase even if output falls. Real GDP = Nominal Y/GDP deflator x 100 nominal GDP measures output & prices So, nominal GDP measures output & prices. Real measures only output [actual production] Constant (real) GDP current (money) GDP Constant (real) GDP v. current (money) GDP

Real GDP = Nominal GDP/Index X 100 Real GDP = Nominal GDP/Index X 100 Practice Macroeconomic Formulas NS 12 and real GDP 12. Using the above formula, what is the real GDP for 1994 if nominal GDP was $6,947 trillion and the GDP deflator was 126.1? ($6,611/$5,610/$5,509) billion. 13.real GDP 13. For 1996, what would real GDP be if nominal GDP were $7,636 trillion and the GDP deflator were 110.2? ($6,929/$9,628/$6,928). [$6,947/126.1 x 100 = $5,509 trillion [$7,636 trillion/110.2 x 100 = $6,929 trillion]

Characteristics of Expansions and Recessions Expansions 1. Less unemployment 2. Increase in real GDP 3. Rapid job growth 4. Increasing interest rate 5. Increasing prices 6. Fewer social problems (alcoholism, domestic violence, divorce, and suicides) Four Phases of Business Cycle Recessions 1. More unemployment 2. Decrease in Real GDP 3. Reduced job growth 4. Lower interest rates 5. Decreasing prices 6. More social problems (alcoholism, domestic violence, divorce and suicide)

Three Types of Unemployment 1.Frictional 1.Frictional – “temporary”, “transitional”, “short-term.” (“between jobs” or “search” unemployment) Examples: “fired”“quit” a. People who get “fired” or “quit” to look for a better one. “Graduates” b. “Graduates” from high school or college who are looking for a job. “Seasonal” c. “Seasonal” or weather-dependent jobs such as “agricultural”“construction”“retail”“tourism” “agricultural”, “construction”, “retail”, or “tourism”. [lifeguards, resort workers, Santas, & migrant workers.] “new jobs” Frictional unemployment signals that “new jobs” are available “freedom of choice”. and reflects “freedom of choice”. These are qualified workers “transferable” skills.

2. Structural Unemployment Structural “technological” “long term”. Structural – “technological” or “long term”. “structure” There are basic changes in the “structure” of the labor “skills obsolete”. force which make certain “skills obsolete”. Automation Automation may result in job losses. Consumer taste Consumer taste may make a good “obsolete”. auto The auto reduced the need for carriage makers. Farm machinery Farm machinery reduced the need for farm laborers. “Creative destruction” “Creative destruction” means as jobs are created, other jobs are lost. Jobs of the future destroy jobs of “natural today. Frictional and Structural make up the “natural rate of unemployment” rate of unemployment”. “These jobs do not come back.” “Non-transferable skills” “Non-transferable skills” – choice is prolonged unemployment or retraining.

C yclical U nemployment 3. C yclical U nemployment Cyclical “ economic downturns”business cycle Cyclical – “ economic downturns” in the business cycle. “Cyclical fluctuations”“deficient AD” “Cyclical fluctuations” caused by “deficient AD” “Durable goods jobs” “Durable goods jobs” are impacted the most. can be postponedcan be repaired T hese can be postponed because they can be repaired. “Cyclical unemployment”“real unemployment”. “Cyclical unemployment” is “real unemployment”. “These jobs do come back.”

Unemployment 5,655,000 Unemployment Rate = Labor Force x 100; 4.0% = 140,863,000 x 100 [Employed + unemployed] [135,208,000+5,655,000] [Employed + unemployed] [135,208,000+5,655,000] I n Forney, 42 are unemployed & 658 are employed. T he unemployment rate is __ %. One mil. are unemployed & 19 mil. are employed. The unemploy. rate is __%. 6 5 NS 41 NS million, civilian labor force 41. If the total population is 280 million, and the civilian labor force 129,558,000 with jobs & 6,739,000 unemployed includes 129,558,000 with jobs & 6,739,000 unemployed but looking employment rate for jobs, then the employment rate would be ____%. 4.9 [6,739,000/136,297,000 x 100 = 4.9%]

Negative/Positive GDP Gaps “Natural Rate of Unemployment” [4-6%] AD 3 AD 1 AD 2 AS 11 % 6 % 1 % Y R Y* F Y i Y A Y P Y A $9 T $10 T $11 T R ecessionary GDP Gap Inflationary GDP Gap

Demand-Pull Inflation Demand-Pull Inflation – increase in AD. [“Too many dollars chasing too few goods”] “buyers side of the market” Originates from “buyers side of the market” Cost-Push Inflation Cost-Push Inflation – 3 things may cause “cost-push” inflation. Wage-push 1. Wage-push – strong labor unions Profit-push 2. Profit-push – companies increase prices when their costs increase. Supply-side cost shocks 3. Supply-side cost shocks – unanticipated increase in raw materials such as oil. Demand-Pull & Cost-Push Inflation D 1 D 2 “Demand-pull” P2P2P2P2 “Wage-price”Spiral S1S1S1S1 S2S2S2S2D PL 2 PL 1 “Cost-push” S P1P1P1P1

[-11/160 x 100 = -6.9%] (2000-later year) (1999-earlier year) (2000-later year) (1999-earlier year) Current year’s index – last year’s index (5.6) Current year’s index – last year’s index (5.6) C.P.I. = Last year’s index(1999-earlier year) x 100; x100 = 3.4% (6.7) (-4) (33) (6.7) (-4) (33) x 100 = ____ 120 x 100 = ____ 300 x 100 = ____ x 100 = ____ 120 x 100 = ____ 300 x 100 = ____ Figuring Inflation Figuring Inflation [Change/Original X 100 = inflation]5.4% -3.3% 11% NS 50, 51, & 52 NS 50, 51, & The CPI was in 1999 and in Therefore, the rate of inflation for 2000 was (2.7/3.4/4.2)% 51. If the CPI falls from 160 to 149 in a particular year, the economy has experinced (inflation/deflation) of (5/-4.9/-6.9)%. 52. If CPI rises from to in a particular year, the rate of inflation for that year is (1.6/2.0/4.0)%. [5.6/166.6 x 100 = 3.4%]

NominalIncome RealIncome InflationPremium - 16% 10 % 6%6%6%6% [ Nominal income – inflation rate = Real Income] =

Misery Index