Inflation :

Inflation: general rising level of prices

• reduces the "purchasing power" of money 
• Example: 
• It takes $2 to buy today what $1 bought in 1982
• It takes $6 to buy today what $1 bought in 1961

Three Causes of Inflation

1. Printing too much money (The Quantity Theory) 
2. Demand-Pull Inflation 
1. "Too many dollars chasing too few goods" - caused by an excess of demand over output that pulls prices upwards
3. Cost-push inflation 
1. Higher Production costs increase prices

Standards Inflation Rate: 2-3%

Inflation Rate=(Current Year Price Index - Base year Price Index/ Base Year Price Index) x 100

Rule of 70: used to calculate the number of years it will take for the price level to double at any given rate of inflation 

Rule of 70= (70/ annual inflation rate)

Deflation: general decline in the price level 

Disinflation:  it occurs when the inflation rate declines 

Real Interest Rates: percentage increase in purchasing power  that a borrower pays to the lender. (adjusted for inflation)

Real= nominal interest rate - expected inflation

Nominal Interest Rates: the percentage increase in money that the borrower pays back to the lender not adjusting for inflation 

Ex: You lend out $100 with 20% interest

Unanticipated inflation: 

Hurt by Inflation: Lenders-People who lend money (at fixed interest rates) , People with fixed incomes, Savers 

Helped by Inflation: Borrowers- People who borrow money , A business where the price of the products incrassees faster than the price of resources. 

Nominal GDP vs Real GDP

 Nominal GDP: the value of output produced at current prices.

• can increase from year to year if either output or prices increase.
• Nominal GDP= Price X Quantity

Real GDP: the value of output produced at constant based year prices. 

• it is adjusted for inflation
• Real GDP= Price X Quantity
• can increase from year to year only if output increases 

Key Tips:

• If you want to measure economic growth, you measure Real GDP
• Only in the base year does Real GDP equal to Nominal GDP
• In years after the base year, Nominal GDP will exceed Real GDP 
• In years before the base year, Real GDP will exceed Nominal GDP
• If base year is not given, the earliest year is the base year

GDP Deflator: a price index that is used to adjust from Nominal to Real GDP 

• GDP Deflator= (Nominal GDP/ Real GDP) x 100

Consumer Price Index (CPI): it measures inflation by tracking changes in the price of a market basket of goods. 

• CPI= (Price of Market basket in current year/ Price of market basket in base year) x 100

Calculating the GDP: Expenditure and Income Approach

Depreciation: the loss of value of capital equipment due to normal wear and tear.

Formulas: 

Expenditure Approach to GDP= C + Ig + G + Xn
C= Consumption
Ig= Gross Domestic Investment
G= Government Spending
Xn= Net Exports

Income Approach to GDP= W + R + I + P + Statistical Adjustment

W- Wages/ Compensation of employee/ salary

R- Rent 

I- Interest 

P- Profit 

Budget= Government Purchases of Goods and Services + Transfer Payments - Government Taxes & Fee Collection   (if answer is +=deficit -= surplus)

Trade= Exports - Imports (if answer is += surplus -= deficit)

National Income=

•  Compensation of employees + Rental Income + Interest Income + Properitors Income + Corporate Profit 
• GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payments 

Disposable Personal Income= National Income - Personal Household Taxe + Government Transfer Payments. 

Net Domestic Product = GDP - Depreciation 

Net National Product = GNP - Depreciation 

Gross Investments= Net Investment + Depreciation 

GNP= GDP + Net Foreign Factor Payment 

GDP (Gross Domestic Product)

GDP: the total value of final goods and services that are produced within a country’s borders

In  a given year

Includes: all production or income earned within the U.S. by U.S. and foreign producer. It excludes production outside of the U.S. even by Americans

GNP: (gross national Product): It is the total of all goods and services that are produced by Americans in a given year.

Includes: production or income earned by Americans anywhere in the world. It excludes production by non-americans even in the United States.

GDP= C + Ig + G +Xn

C=Consumption - finals good and services that are being produced (67% of the economy)

Ig: Gross Private Domestic Investment (17% of the economy)

Ex: construction of new houses, factory equipment, factory equipment maintenance, and unsold inventory that products are built in a year.

G: Government spending( 18% of the economy)

Ex: school buses, highways, guns

Xn: net exports (Exports-imports) (-2% of the economy)

GDP

Excluded:  

• Intermediate goods - avoid double or multiple counting
• Used or second-hand goods -avoid double counting
• Unreported business activities -tips
• Stocks and bonds
• Non-market activity
• Illegal activity Ex: prostitution
• Gifts or Transfer Payments (Public or Private) Ex: scholarships, social securities, unemployment

Stock & Bonds: purely financial transaction (there’s no production; just investments)

Circular Flow

Circular Flow - Represents the transactions in an economy by flows around a circle.

2 Economic Actors:

1. Household - Person or a group of people who share their income

2. Firm or Business - Organization that produces goods and services for sale.

Factor Market: FOP (Factors of Production)

Product Market: Goods & Services

Willy Rest In Peace = Wages, Rents, Interest, Profit.

Elasticity of Demand

What causes a “change in demand”?

• Change in Income:

1. Normal goods - as income increases, demands increase
2. Inferior goods - as income increases, demand for goods increase

• Elastic demand:
• demand that is sensitive to a change in $$
• A product, not a necessity
• available substitute
• ex: steak, fur coat
• e > 1
• Inelastic demand
• demand that is not sensitive to a change in $$
• product = necessity
• few to no substitutes
• ex: gas, insulin
• e < 1
• Unitary elastic
• e = 1

Step 1: Quantity

• new quantity - old quantity

    old quantity

Step 2: Price

• new $$ - old $$

old $$

Step 3: PED

• % change in quantity

       % change in $$

P x Q = Total revenue

• Total amount of $$ a firm receives from selling goods & services

Marginal Revenue

• Additional income from selling an additional limit
• New Total Cost - Old Total Cost = Marginal Cost

Equilibrium:

The point in which the supply curve intersects with the demand curve

Excess Demand:

occurs when quantity demanded is greater than quantity supplied.

(result in a shortage-consumers can't get the quantities of items that they want )

Price Ceiling:

when the government puts a legal limit on high the price of a product  

(found under the point of equilibrium) Price Ceiling -> creates shortage

Ex: Rent Control

Excess Supply:

occurs when quantity supplied is greater than quantity demanded

(result in a surplus-producers have inventory that they can’t get rid of)

Price floor:

the lowest legal price a commodity can be sold at. (found above the point of equilibrium)

Ex: Minimum Wage

Factors of Production

Factors of Production

1. Land:natural resources
2. Labor: work exerted
3. Capital:
1. Human Capital: when people acquire skills and knowledge through experience and education
2. Physical Capital: consist of money, tools, buildings, equipment, and machinery
4. Entrepreneurship: risk-taker, innovative

• Trade offs: an alternative that we sacrifice that we make a decision (Scarcity leads to Tradeoffs)
• Opportunity Cost: the most desirable alternative given up as a result of a decision
• Guns or Butter: refers to tradeoffs that the governments make when choosing whether to produce more or less military or consumer goods
• Thinking at the Margins: deciding whether to add or subtract one additional unit of some resource
• Production Possibilities Graph (PPG): graph that shows alternative ways to use an economy's resources

     Curve (PPC)       

     Frontier (PPF)

• Efficiency: using resources in such a way to maximize the production of goods and services (increases profits)
• Underutilization: (opposite of efficiency) using fewer resources than an economy is capable of using. (leads to a decrease in profit)

4 key Assumptions (PPG):

1. Only 2 goods can be produced
2. Full employment of resources
3. Fixed Resources (factors of production)
4. Fixed Technology