1. Inflation, Unemployment, and National Income: The Abridged Version
Because we never know when disaster will strike…

2. GDP Gap and Okun’s Law
When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost.
GDP Gap- The amount by which actual GDP falls short of potential GDP

4. How do we solve for the GDP Gap?
Okun’s Law indicates for every 1% unemployment exceeds the natural rate (6%) a gap of about 2% occurs
Real Unemployment Rate (%) x Okun’s 2

5. NDP- Net Domestic Product
GDP does not take into account the consumption of fixed capital (depreciation)
To determine how much new output was available consumption and for additions to the stock of capital we subtract the capital that is consumed through production from GDP and that had to be replaced
NDP= GDP – Consumption of fixed capital (depreciation)

6. National Income
We can then use NDP to determine National Income (NI) by making two adjustments
Subtract Net foreign factor income
Subtract indirect business taxes
Billions
NDP
$8709
Net foreign factor income -9
Indirect business taxes
-682
National Income
$8018

7. Personal Income Includes all income received whether earned or not
When moving from NI to PI we must subtract what is earned but not received (taxes/undistributed corp. profits) and add the income that is received but not earned (SS payments, unemployment, welfare)

8. Disposable Income
Personal Income- personal taxes (income tax, property tax, inheritance tax)
Disposable income is the amount of income that households have left over after paying taxes

9. Inflation Rise in the general level of prices
This does not mean that all prices are rising
Ex. The U.S. experienced high rates of inflation in the 70’s and 80’s but the prices of video recorders, digital watches, and personal computers declined.
This is why we use CPI to determine the rate of inflation for a given good

10. Inflation Rate of inflation= current CPI-base CPI X 100 base CPI
Rule of 70: we can find the number of years it will take for some measure to double; given its annual percentage increase by dividing it into 70
So how long will it take a 3 percent annual rate of inflation to double the price level?

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

12. Nominal and Real Income
Nominal Income is the number of dollars received as wages, rents, interest, or profits
Real income is a measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation
Real Income= Nominal Income
Price Index

13. [During deflation, the $ buys more but during inflation, it buys less]

14. Who is hurt by inflation?
Fixed-income receivers
Private pensions for elderly
Landlords receive fixed lease payments
Savers
the value of savings will decline if the rate of inflation exceeds the interest rate
Creditors
The borrower is lent “dear” dollars, but because of inflation, pays back “cheap” dollars

15. Who is helped by inflation?
Flexible-income receivers
Social security
Cost-of-living adjustments
Debtors
Business
When the price of goods rises faster than the price of resources