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National Income Accounting [GDP and its four cousins] C + Ig + G + Xn [X-M] = [“Replacement capital”] GDP–Depreciation= [what is for sale] NDP –NFFIEUS–Indirect Business Taxes = NI–Undis Corp Profits–Corp Inc Taxes -Soc Secur+TP= [PI is what you can spend, save, or pay in taxes] PI – Personal Income Taxes = [DI is what you can spend or save ] Answers to “Is It Counted in GDP?” NIA Practice – “How To Do It” Personal taxes 403 Imports 362 +Transfer payments 283 -Corporate Income Taxes 88 Indirect business taxes 231 Exports 465 -Undistributed corp. profits 46 -Social Security contrib. 169 Personal consumption 2,316 Gross private domes invest. 503 Government purchases 673 Depreciation [Capital consumption] 307 I’m going through an N.F.F.I.E. in the U.S. 12 academic recession. C = $ ______ 2,316 Report Card Ig = $ ______ English C 503 Accounting C G = $ ______ 673 American History D ROW Economics F Xn = $ ______ +103 Gross Domestic Product (GDP) $______ 3,595 $ -307 -Consumption of fixed capital ______ 3,288 Net Domestic Product (NDP) $_______ -12 ______ -Net For. Factor Inc. Earn. U.S. ______ -231 -Indirect business taxes 3,045 $______ National Income (NI) -46 ______ -Undistributed Corporate Profits ______ -88 -303 NFFI = $12 -Corporate income taxes ______ -Social Security Contributions -169 +283 +Transfer payments _______ 3,025 Personal Income (PI) $_______ -403 ________ -Personal Taxes $_______ Disposable Income (DI) 2,622 100 $112 Positive Net Investment [Ig>D] Gross Investment - Depreciation =Net Investment Gross Investment Net Investment Depreciation [increasing product. capac.] Increased Stock of Capital Consumption and Government Spending Stock of Capital January 1 Year’s GDP December 31 Nominal [money] GDP v. Real GDP An increase in prices and/or output will increase nominal 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 So, nominal GDP measures output & prices. Real measures only output [actual production] Constant (real) GDP v. current (money) GDP Practice Macroeconomic Formulas Real GDP = Nominal GDP/Index X 100 NS 12 and 13 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. [$6,947/126.1 x 100 = $5,509 trillion 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). [$7,636 trillion/110.2 x 100 = $6,929 trillion] Four Phases of Business Cycle Characteristics of Expansions and Recessions Expansions Recessions 1. More unemployment 1. Less unemployment 2. Decrease in Real GDP 2. Increase in real GDP 3. Reduced job growth 3. Rapid job growth 4. Lower interest rates 4. Increasing interest rate 5. Decreasing prices 5. Increasing prices 6. More social problems 6. Fewer social problems (alcoholism, domestic violence, (alcoholism, domestic violence, divorce and suicide) divorce, and suicides) Three Types of Unemployment 1.Frictional – “temporary”, “transitional”, “short-term.” (“between jobs” or “search” unemployment) Examples: a. People who get “fired” or “quit” to look for a better one. b. “Graduates” from high school or college who are looking for a job. c. “Seasonal” or weather-dependent jobs such as “agricultural”, “construction”, “retail”, or “tourism”. [lifeguards, resort workers, Santas, & migrant workers.] Frictional unemployment signals that “new jobs” are available and reflects “freedom of choice”. These are qualified workers “transferable” skills. 2. Structural Unemployment Structural – “technological” or “long term”. There are basic changes in the “structure” of the labor force which make certain “skills obsolete”. Automation may result in job losses. Consumer taste may make a good “obsolete”. The auto reduced the need for carriage makers. Farm machinery reduced the need for farm laborers. “Creative destruction” means as jobs are created, other jobs are lost. Jobs of the future destroy jobs of today. Frictional and Structural make up the “natural rate of unemployment”. “These jobs do not come back.” “Non-transferable skills” – choice is prolonged unemployment or retraining. 3. Cyclical Unemployment Cyclical – “economic downturns” in the business cycle. “Cyclical fluctuations” caused by “deficient AD” “Durable goods jobs” are impacted the most. These can be postponed because they can be repaired. “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] 6%. In Forney, 42 are unemployed & 658 are employed. The unemployment rate is __ 5 One mil. are unemployed & 19 mil. are employed. The unemploy. rate is __%. NS 41 41. If the total population is 280 million, and the civilian labor force includes 129,558,000 with jobs & 6,739,000 unemployed but looking for jobs, then the employment rate would be ____%. 4.9 [6,739,000/136,297,000 x 100 = 4.9%] Negative/Positive GDP Gaps Inflationary GDP Gap AS AD2 AD3 Recessionary GDP Gap AD1 11% 6% 1% YR Y*F Yi YA YP YA $9 T $10 T $11 T “Natural Rate of Unemployment” [4-6%] 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” D1 D2 S P2 P1 “Demand-pull” D S2 PL2 PL1 S1 Cost-Push Inflation – 3 things may cause “cost-push” inflation. “Cost-push” 1. Wage-push – strong labor unions 2. Profit-push – companies increase prices when their costs increase. “Wage-price” 3. Supply-side cost shocks – unanticipated Spiral increase in raw materials such as oil. Figuring Inflation [Change/Original X 100 = inflation] (2000-later year) (1999-earlier year) Current year’s index – last year’s index 172.2-166.6(5.6) C.P.I. = Last year’s index(1999-earlier year) x 100; 166.6 x100 = 3.4% 130.7-124.0(6.7) 116-120(-4) 333-300(33) 11% 124.0 x 100 = ____ 300 x 100 = ____ -3.3% 5.4% 120 x 100 = ____ NS 50, 51, & 52 50.The CPI was 166.6 in 1999 and 172.2 in 2000. Therefore, the rate of inflation for 2000 was (2.7/3.4/4.2)% [5.6/166.6 x 100 = 3.4%] 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)%. [-11/160 x 100 = -6.9%] 52. If CPI rises from 160.5 to 163.0 in a particular year, the rate of inflation for that year is (1.6/2.0/4.0)%. [Nominal income – inflation rate = Real Income] 16% Nominal Income 6 % Inflation Premium = 10 % Real Income Misery Index