GDP Gap It is the amount by which actual GDP fall short of potential GDP. OKUNS law for every one percent in which the actual unemployment rate exceeds the NRU (natural rate of unemployment) a GDP gap of about 2% occurs. for example- in 2012, the unemployment rate for mexico was 7.4%, the NRU for mexico is 6%. 7.4 - 6 = 1.4 * 2 = 2.8 2.8 potential loss in GDP.
Rule of 70 It is used to determine how many years it takes for a value to double, given a particular annual growth rate. for example if you put 20,000 dollars in a bank and it earns a yearly interest of 7% how many years will it take for your income to double? 70/7 = 10
Unemployment
It is the failure to use available resources particularly labor to provide desired goods and services.
Underemployment
not using all of the resources or labor (George Bush high school will be a good example or working less than 24 hours in a week).
Labor Force
- above 16 years of age.
-able and willing to work. NOT in the Labor Force
1. Military
2. Students
3. Retired people
4. Disabled.
5. Home makers
6. Mental institution
7. Jail/prison.
8. those not looking for a job.
Standard Unemployment rate. 4%-5% = full employment or natural rate of unemployment (NRU)
How to calculate the unemployment rate.
# of unemployed / # of employed + # of unemployed * 100
Types of unemployment.
1. Frictional: those who are searching for a job. Those temporarily unemployed or in between jobs. they have transferable skills. for example college and high school graduates or people that were layed off.
2. Structural: Change in the structure of the labor force makes some skills obsolete . they have to learn new skills in order to get a job.
3. Seasonal: it is due to the time of year and the nature of the job. for example School bus drivers, life guards, Santa clause, Easter bunny impersonators and construction worker.
4. Cyclical: this is unemployment that results from economic downturns such as recessions. as demand falls for goods and services demand for labor falls and workers are laid off.
formula for Natural rate of unemployment (NRU): frictional + structural.
Full employment
This means there is no cyclical unemployment.
It is the value of
output produced in the current year prices. Nominal GDP from year to year increases if
either output or prices increase (it is used for measuring inflation)
formula=Price multiplied by Quantity.
REAL GDP
It is the value of output produced in constant or base year
prices (it is adjusted for inflation). Real GDP can increase from year to year only
if Quantity increases (used for economic growth)
Quantity in
2015
Quantity in
2016
Price in 2015
Price in 2016
Pizzas
5
6
$10
$15
CDs
4
5
$15
$20
Stereos
2
4
$550
$600
Automobile
1
1
$10,000
$12,000
Real GDP formula=PRICE multiplied by QUANTITY
Real GDP in 2015 = $11,210
Real GDP in 2016 = $12,335
Nominal GDP in 2015 = $11,210
Nominal GDP in 2016 = $14,590
GDP DEFLATOR
This is a Price Index used to
adjust from Nominal to Real GDP.
Formula = Nominal GDP / Real GDP * 100
In the base year =
GDP Deflator = 100.
For years after the
base year GDP deflator is greater than 100. For years before the base year, GDP
deflator is less than 100.
CONSUMER PRICE INDEX
(CDI)
It is the most commonly used measurement of
inflation. It measures the market basket of goods for a typical urban American
family.
formula= price of a market basket of goods in the current year/price of a market basket of goods in the base year * 100
INFLATION
price index in year 2- price index in year 1 / price index in year 1 * 100 Real vs Nominal interest Rates. Real interest rate it is the percentage increase in purchasing power the burrower must pay the lender for a loan. real interest rate is adjusted for inflation. purchasing power is decreased when one pays more than they purchased. formula for real interest rate : Norminal Interest -Inflation rate. Nominal interest rate it is the percentage increase in money the burrower must pay the lender for a loan. it is not adjusted for inflation. formula: expected interest rate + inflation premium.
COLA Adjustment
COLA is an automatic wage increase when inflation occurs. it is used by New York and California
