Unit 7: Balance of Payments

5/8/17
Balance of payments 

• measure of money inflows and outflows between the US and the rest of the world (ROW)
• inflows are referred as credit
• outflows are referred as debits 

The balance of payments is divided into 3 accounts

•  Official reserves accounts 
  
•  Current account 
•  Capital/finance account 

 Balance of trade or net exports

•  Exports of goods and services -  imports of goods and services
•  Exports create a credits a balance of payments 
•  Imports create a debit to the balance of payments 

 Net foreign income

•  Income earned by US own foreign assets  -   Income paid to foreign health US assets 
• Ex:  interest payments on US only Brazilian bonds  -   Interest payments on German own treasury bonds 

 Net transfers
 Foreign aid --->   A debit to current account

• Ex:  Mexican migrant workers send money to family in Mexico 

 Capital/finance account

•  The balance of R ownership 
•  Includes the purchase of both real and financial assets 
•  Direct investments in the US is credits of capital account 
• Direct investments by US firm/individuals and a foreign country our debit so the capital account
•  Purchase a foreign financial assets represented a debit to capital account 
•  Purchase of domestic financial assets by foreigners represents a credit to the capital account 
• The united Arab emirates sovereign wealth fund purchase a large steak in the and a NASDAQ

 Relationship between current and capital account

•  The current account and the capital account should zero each other out 
•  If the current account has a negative balance then the capital account should have a positive balance of official reserves 
•  The foreign Currency holdings of the US Fed reserves SGS 
•  When there is a balance of payments surplus the Fed accumulates flooring Currency and debits 

 The balance of payments

•  When there is a balance with humans deficit the Fed the pleats it's reserves of foreign Currency and credits the balance of payments 
• The official reserves zero out the balance of payments

5/9/17

•  Balance of trade=  Good exports + goods imports 
• Balance of goods and services = good exports + service exports - goods imports + services imports
•  Currency account = balance of goods + services + not investments + net transfers 
•  Balance on capital account = investments or stocks and bonds 
•  Official reserves = current account ( whatever falls into the category of investments or stocks and bonds) +  Capital account = 0 

5/10/17
 Foreign exchange

•  The buying and selling of Currency 
•  Any transactions that occurs in the balance of payment necessitates foreign exchange 
•  The exchange rate is determined in the foreign Currency market 

Exchange rate  determinants

•  Consumer taste 
  
•  Relative income 
•  Relative  price level
•  Speculation 

-appreciation of the money causes American goods to to be expensive and foreign goods to be cheaper than us reducing exports and increasing   Imports
- depreciation of the money causes American goods to be cheaper and foreign goods to be more expensive does increasing exports in reducing imports
5/11/17
- specialization-individuals and countries can be made by better off if they will produce in what they have a comparative advantage and then trade with other  countries for whatever else they want/need
- absolute advantage - The producer that can produce output or requires the least amount of input
- comparative advantage - The producer with the Lowe's opportunity cost
- Country should trade if they have relatively lower opportunity cost
- they should specialize in the good that is cheaper for them to produce
Input versus output
- an output problem presents the data as products produced given a set of resources
Ex: Number of pens produce
- an input problem presents the data as amount of resources needed to produce a fixed amount of output
Ex: Number of labor hours to produce 1 bushel
- when identifying  an absolute advantage and input problems change the scenario friend who can produce a given product with least amount of resources

Unit 5: Supply Side Economics Reaganomics

4/24/17
Reaganomics

• Trying to stimulate production or supply output.
• To achieve this they cut taxes and government regulations to increase incentives for business and individuals.
• businesses invest and expand creating jobs and people work, save, ad spend more  
• Laffer curve depicts a theoretical relationship between tax rates and tax revenues.

Laffer Curve

• Empirical evidence suggest that the impact of tax rates on incentives to work, save, and invest are small.
• tax cuts also increase demand which can fuel inflation and demand impacts may exceed supply impacts.
• where the economy is actually located on the laffer curve is difficult to determine.

Unit 4: Tools of Monetary Policy

4/3/17

1.  Open market operation -  when the Fed buys or sells government bonds, this is the most important and widely use monetary policy
-  if the Fed buys bonds out of the economy and replaces it with money MS increases
-  if the Fed sells bonds it takes money and give security to the investors therefore MS decreases

2.  Reserve requirement -  Dollar amount that must be kept back

• The Fed sets of the amount in the bank must hold
•  The loan eventually become still posits for another bank that will loan out their excess reserves
• - if there is a recession, what should the fat Jew to the reserve requirement ?

•  decrease the reserve ratio ,  Banks hold less money and have more excess reserves, banks create money by loaning out excess reserves, money supply increases, interest rates fall, AD goes up
•   and if there is an inflation ?
•  increase the reserve ratio -  Bank equals more money less excess reserves, creates less money, MS decreases, Ir increases, AD decreases

3.  The discount rate 
-  there are many different interest rates, but they tend to all  rise and fall together
-  The discount rate is the interest rate that the Fed places
-  The federal funds rate is the interest rate that banks charge one another for overnight loans
-  The prime rate is the interest rate that banks charge their most credit worthy customers

4/04/17
Loanable  funds market 
- The private sector supply and demand loans
-  this market bring some gather those who want to lend money and those who want to borrow
-  this market shows the effect on the real interest rate
-  demand -  inverse relationships between real interest rate and quantity loans demanded

I

-  supply -  Direct locations to between real interest rate and quantity loan supplied

Here's a video discussing monetary policy and more!

Unit 4: Money creation formula

3/27/17 

• A single can create money by the amount of excess reserves
• The banking system as a whole can create money by a multiplier of excess reserves
• MM x ER = expansion of money 
• Money multiplier= 1/RR
• New Existing Money

- if the initial deposit in a bank comes from the fed or a bank purchase of a bond or other money out of circulation (buried treasure) The deposit immediately increases the money supply
- The deposit then leads to further expansion  of the money supply through the money creation process
-Total change in MS if the initial deposit is new money= deposit+money created by banking system
-if a deposit in a bank is existing money (already counted in M1 ) depositing the amount does not change the MS immediately because it is already counted.
-Existing currency deposited into a checking account changes only the composition of the Money supply from coins/ paper money to checking accounts deposits
- Total change in the MS if deposit is existing money = banking system created money only.

3/29/17

Money Creation Process 

-$1000 in cash is deposited in a checking account ->  no immediate change in MS ->Assets
- $1000 fed  purchase of bonds from the public deposited into the checking account ->  immediate increase in MS in $1000 ->  liabilities
- Single bank - amount of money they can loan out of ER
- banking system - can create money by a multiplier of its initial excess reserve (ER x MM)
-  total change in the money supply as a result of the initial deposit.

https://www.youtube.com/watch?v=JG5c8nhR3LE ( A video elaborating on the money creation process)

Unit 4: Bonds vs Stocks

3/22/17

• Bonds are loans or IOU'S that the debt of the government or a corporation must repay to an investor. Te bond holder has no ownership
• How are the values of a bond determined? 
• If a corporation issues and then sell a bond is a liability or  an asset? Liability
• However it would be an asset for the buyer 

1. Dividends (interest)- portions of corporations profits, they are paid out by the stock holder
2. A capital gain is earned when a stockholder sells stock for more than he or she has paid for it 

- A stockholder that sells stocks at a lower price than the purchase suffers a capital loss
3/23/17

• Demand for money has an inverse relationship between nominal interest rates and the quantity of the money demanded

1. What happens to quantity demanded of money when interest rate increases? Quantity demanded falls because people want lower interest rates
2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increase

• Determinants for demand for money to shift (rarely shift)

- Change in price level
- Change in income
- Change in taxation that affects investments
increasing in money supply=decrease interest rate=increase in investments=increase AD

• How do banks make money?

-Fractional reserve system- Process in which banks hold a small portion of their deposits
-Demand deposits are created through the fractional reserve system
-Banks keep cash on hand (required reserve) to meet depositors needs
-Total reserve -(total fund held by a bank)= required reserves+ excess reserves
- Banks can only lend out their excess reserves

https://www.youtube.com/watch?v=-oSz4ckdxqQ

Unit 4: Why do we use money?

3/20/17

• The barter System- goods and services that are traded directly. There is no money exchanged
• Money - Anything that is generally excepted i payment for goods or services.
• Wealth- total collection of assets that store value.
• Income- Flow of earnings per unit of time.
• Money can be used as...

1. A medium of exchange
   
2. Unit of account
3. Store of value 

• 3 Types of Money

1. Representative Money- Represents something of value( "Iou's")
2. Commodity Money- Has value within itself Ex; Gold, Salt
3. Fiat Money- Money because the government says so.

• Characteristics of Money

1. Durability
2. Portability
3. Uniformity
4. Divisibility
5. Limited supply
6. Acceptability

• 3 Types of Money

- Liquidity- ease with which an asset can be accepted or converted into cash (liquidized)
- M1 (High Liquidity)- Coins, currency, and checkable deposits( personal and corporate checking accounts which are the largest component of M1). AKA demand deposits. In general is Money supply.
- M2 ( Medium Liquididty)- M1 plus savings deposits ( Money marked accounts) Time deposits (C'Ds= certificates of deposits) and mutual funds below $100K
- M3 (Low Liquidity)-M2 plus deposits above $100K

Unit 4: The Financial System

3/21/17 

• Purpose of Financial Instituters
  

A. Store $
B. Save $
-Savings account
-Checking account
-CD
Money market
C. Loan $
- Interest- Price paid for the use of borrowed money
- Principal- Amount of money you borrow

• Types of Financial intermediaries 

1. Commercial banks 
2. Savings and loans
3. Credit union
4. Mutual fund companies
5. Finance 

• The Financial System

- Assets- Anything monetary, owned by a person or business
- Financial Assets- a paper claim that entitles the buyer future to future income from the seller
- Physical Assets- a claim on a tangible object
- Liability- a requirement to pay money in the future

• 5 Major Financial Assets

1. Loans
2. Stocks
3. Bonds
4. Loan bake securities 
5. Bank deposit interest rate and inflation

• The Time Value of Money

- A dollar is worth more today than it is tomorrow. You are losing money every second you are not investing.

• Future Value v Present Value 

-FV= Future value, PV=Present value, i= Nominal interest rate, t= Time

- Future Value- If you invest ( Lend money to someone ) it will compound (grow) according to the following equation. FV= PV(1+i)^N

- Present Value- The amount of money i need to invest now in order to get some amount in the future PV= FV/(1+i)^N

- Simple interest- V=(1+r)^n *P

- Compound Interest- V=(1+r/k)^nk*P

Unit 3: Fiscal Policy

3/06/17

Fiscal Policy 

• Fiscal Policy

- Actions by congress to stabilize the economy.

- 2 Tools to Fiscal Policy 

1. Taxes- Government can increase or decrease taxes
2. - Spending- Government can increase or decrease spending 

- Fiscal policy is used to promote our nations economic goals: full employment, price stability, and economic growth .

• Deficit, Surpluses, and Debt

*Balanced Budget

- Revenues ( bring in)= Expenditures (spend)

*Budget Deficit

- Revenues < expenditures

*Budget Surplus

- Revenues> expenditures 

*Government Debt

- Sum of all deficits- sum of all surpluses 

- The government can borrow money when it runs a budget deficit, They can borrow from...

- Individuals

-Corporations

-Financial institutions

-Foreign entities 

•  Options of fiscal Policy 

1. Discretionary fiscal policy (action by congress)
2. Expansionary fiscal policy (think deficit)
3. Contractionary fiscal policy ( think surplus)
4. Non-discretionary fiscal policy (no action)

• 3 Types of Taxes 

- Progressive Tax- Takes a larger % of income from high income groups

- Proportional Tax- Takes the % of income from all income groups 

- Regressive Taxes- Takes a larger % from low income groups ( takes more from poor people)

• Contractionary Fiscal Policy

- laws that reduce inflammation, decrease GDP and close the inflationary gap 

-  they can either decrease government spending or increase taxes or a combination of the two 

•  Expansionary fiscal policy 

- laws that reduce unemployment and increase GDP and close a recessionary gap 

- they can either increased government spending or decrease taxes are consumers or a combination of the two 

•  Automatic or built in stabilizers 

- anything that increases the government budget deficits during a recession and increase its budget surplus during installation without requiring explicit action by policymakers 

•  Transfer payments 

- welfare checks 

- food stamps 

- unemployment checks 

- corporate dividens

-  social Security 

- veterans benefits 

Unit 3: Consumption and Savings

2/23/27

Consumption and Savings 

• Disposable Income 
  

- Income after taxes or net income

-DI= Gross income-Taxes

-2 Choices with disposable income households 

1. Consume (spend money on goods and services)
2. Save ( not spend money goods and services)

• Consumption 

- Household spending

- the ability to consume is constrained 

- The mount of disposable income  

- The propensity to consume

-Do households save if DI=0? No

-APS= S/DI= % DI that is not spent

• Average Perpencitry to Consume/ Save (APS) (APC)

- APC+APS=1

-1-APC=APS                *https://www.youtube.com/watch?v=mjU1w9jwYwY ( diposible income)

-1-APS=APS

-APC>: Disaving

-APS: Disaving

• Marginal Perpencity to Consume/ Save (MPC)(MPS)

-MPC

- Change in consumption/ change in disposable income

-% of every extra dollar earned 

-MPS

- Change in savings/ change in disposable income

- % of every extra dollar earned is saved 

-MPC-MPS=1

-1-MPC=MPS

-1-MPS=MPC

• Determinants of C and S
  

- Wealth

- Household Debt

- Expectations

- Taxes

2/24/17

• Spending Multiplier Effect

- An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand.

-Multiplier= Change in AD/ Change in spending 

- Expenditures- Income and flow continuously which sets off a spending increase in the economy.

• Calculating the Spending Multiplier

- The spending multiplier can be calculated from the MPC or MPS

- Multiplier=1/ MPC OR 1/1-MPS

- Multipliers are positive where there is an increase in spending and negative when there is a decrease.

• Calculating Tax Multiplier 

- When the government taxes, the multiplier works in reverse  because now money is leaving the circular flow.

- -MPC/1-MPC or -MPC/MPS

- If there is a ta cut , then multiplier is positive because there is now more money in the circular flow.

2/27/17

Reasons why prices tend to be sticky or inflexible in a downward direction...

1. Fear of price wars 
2. wage contracts 
3. minimum wage 
4. Menu Costs
5. Moral effort and productivity 

• 3 Ranges of AD

- Range 1: Output is low, relative to the economy and full employment output; unemployment increases and GDPr decreases.
- Range 2: Output expands as spending increases.
- Range 3: The AS is vertical in the log-run, because the only effects would increase in AD we are already at full employment or an increase in demand by increasing output.

2/28/17

• Classical School 

- The trickle down theory: Help the rich first and then everyone else
- In the LR the economy will balance at full employment output
- The invisible hand

• Keynesian School 
  

- AD is key not AS
- In the LR we are dead
- Leaks cause recessions
- Saving causes recesssions

Unit 3: Aggregate Supply

2/21/17

• Aggregate Supply- Level of real GDP that firms will produce at each price level
• 2 types of aggregate supply

1. Long run- Period of time where input prices are completely flexible and adjust to change in the price level 

 - Vertical line in the middle of the graph= Long run
     2. Short Run- Period of time where input prices are sticky and do not adjust to changes in the price level.
- In the short run the level of GDPr supplied directly to the price level

Long Run Aggregate supply
-The LRAS  marks the level of full employment in the economy                                                       

-The LRAS  marks the level of full employment in the economy                                                    

Short Run Aggregate supply              

 -Because the input are sticky the SRAS is are upward slopping

-an increase in SRAS is as a shift to the right

- a decrease in SRAS is seen as a shift to the left.

- The key to understanding shifts in SRAS is id per unit cost cost of production 

- Per unit cost =(total input cost/ total output

Determinants of SRAS 

• Input prices

- domestic resource prices

- wages (75% of all business costs)

-cost of capital 

-raw materials (commodity prices)

* Foreign resource prices 

-Strong $= lower foreign resource

-weak $= higher foreign resource 

*Market Power 

-Monopolies and cartels that control resources control the price of those resources

- increase in resource prices= decrease in SRAS 

- decrease in resource prices = increase in SRAS

• Productivity

- Productivity= total output/ total inputs

- More productivity = lower unit production 

- lower productivity = higher unit production 

• Legal Institutional Environment

- Taxes and subsidies 

- taxes on businesses increase per unit production

-subsidies to businesses reduce per unit costs 

-Government regulation 

- Government regulation creates a cost of compliance 

-deregulation reduces compliance cost

Unit 3: What is Invetment

2/21/17

Investment

• Investment- Money spent or expenditures on...
  

-New plants (factories)

-capital equipment (machinery)

-technology (hardware and software)

-new homes

-inventory

•  Expected rates of return

*How do businesses make investment decisions?

-cost/benefits analysis

*How do businesses determine the benefits?

-expected rates of return

*How do businesses determine the amount of investments they should undertake?

-Compare expected rate of return too interest of cost

-If the expected rate of return is greater than interest cost = investment
- if the expected rate of return is less than the interest cost = no investment
-r%( real investment)= 1%(nominal rate)-π(inflation)

Investment Demand Curve (ID)

• The investment demand curve is downwards slopping because when the interest rates are high fewer investments are profitable; when interior rates are low more investments are profitable.
• Shifts in AD ...

- Cost of production

- 

- Technological change 

- Stock capital 

-Business taxes

Unit 3: Aggregate Demand

2/16/17

Aggregate Demand

• AD is the demand by consumers businesses, government and foreign countries.
• Changes in the price level cause a move along the curve not a shift of the curve.
• Aggregate Demand- Shows the amount of real GDP that the private, public , and foreign sector collectively desire to purchase at each possible price level.
• The relationship between price level and the level of real GDP is inverse.
• 3 Reasons why AD is Downward Slopping

1. Wealth Effect

-Higher prices reduce the purchasing power of money

-This decreases the quantity of expenditures
-Lower price levels increase purchasing power and increase expenditures

    

 2. Interest Rate Effect

- As price levels increase, lenders need to charge a higher interest rate to get a real return on their loans 

- Higher interest rates discourage consumer spending and business investments 

 3. Foreign Trade Effect

- When US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods 

- Exports fail and imports rise causing real GDP demanded to fall

• Shifts in Aggregate Demand

-There are 2 parts to shift in AD

- a change in  C.Ig,G, and/or Xn

-a multiplier effect that produces a greater change than original change in 4 components 

- Increase in AD= Right shift   Decrease in AD= Left shift in AD
2/17/17

• Determinants of AD

- Consumption (C)
- Gross private investment (Ig)
-Government (G)
- Net Exports (Xn)

• Consumption- Change in consumer spending 
  

- Consumer wealth: boom in stock market
- Consumer expectation: people fear a recession
- Household indebtedness: more consumer debt
- Taxes: a decrease in income tax

• Gross private investments- change in investment spending

- Real interest rates (price of borrowing money), if interest rates increase if interest rates decrease
- Future business expectations: high expectations
- Producing: productivity technology- new robots
- Business taxes: higher corporate taxes
- Government- Change in government spending
- War, national health care, decrease in defense spending.

• Net exports- change in net exports(x-m)

-exchange rates: if the US dollars depreciate it is relative to zero
- National income compared too abroad, if a major importer has a recession , if US has a recession
-" If the US gets cold Canada gets pneumonia."
AD= GDP=C+L+G+Xn

• Government Spending 

- more government spending= AD increasing
-less government spending = AD decreasing

Unit 2: Unemployment

3/9/17

Unemployment 

• Unemployment-  percentage of people who do not have a job in the labor force 
•  Unemployment rate- % of people who want a job but are not working 
• Unemployment rate =( # of unemployed/ # in labor force) x 100
• 4 types of unemployment...

1.  Frictional unemployment-  temporarily unemployed or between jobs 

-  individuals are qualified workers with transferable skills but they aren't working

    2.   Seasonal  unemployment -  due to time of the year and the nature of the job 

    3.   Structural unemployment -  changes in structure of the labor force make some skills obsolete 

- workers do not have transferable skills and these jobs never come back 

-  permanent loss of these jobs is called "creative construction"

    4.  Cyclical unemployment-  downturns in the business cycle 

-  As demand for goods and services falls demand for labor falls and workers are fired

• Standard unemployment rate - 4 to 5%
• Natural rate employment 

-  two of the three types of unemployment are unfavorable

-  frictional unemployment 

- structural unemployment 

-  together they make up the natural rate of unemployment,

 frictional + Structural = NRU

- Full employment =  no slip a cool employment full employment 

-Okund Law-  when unemployment rises 1% above the NRU gap falls about 2% 

Unit 2: Inflation

Continuation of 2/3/17...

• GDP deflator- Price index used to adjust from nominal GDP to real GDP.

-(Nominal GDP/Real GDP) x 100
- In the base year GDP deflator will always equal to 100
-Years after the base year the GDP will be greater than 100
-Years before the base year the GDP deflator is less than 100

• Consumer price Index (CPI)

- Measures inflation by tracking changes in the price of  a market basket goods ( cars, trucks, etc).
-(Price of market basket in current year/ Price of market basket in base year) x 100

2/6/17

Inflation 

• Inflation- Increase or rise in price, it reduces the "purchasing power" ( the amount of goods and services your money can buy) of money

• 3 causes of inflation

1. Printing too much money
2. Demand- pull inflation by an excess of demand over output that pulls public prices upward 
3. Cost push inflation- cause by a rise in per-unit production cost due to an increase in resource cost.

• Ideal inflation rate= 2 to 3%

- Inflation: (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.

• Deflation- General decline in the price level.
• Disinflation- Occurs when the inflation rate itself declines
• Nominal interest rate- unadjusted cost of borrowing or lending money.
• Real interest rate- cost of borrowing or lending money adjusted for inflation 

- real interest rate = Nominal interest rate-expected inflation 

Unanticipated Inflation 

• Hurt by inflation ....

- lender – people who lend the money at fixed interest rates
- people with fixed incomes
-savers

• Helped by inflation....

- borrowers - people who borrow money
- A business where the price of product increases faster than the price of resources

• COLA (cost  of a living adjustment)-  some works have salaries that mirror inflation they negotiate wages that ride with inflation 
• Here is a video elaborating on inflation 

https://m.youtube.com/watch?v=UMAELCrJxt0 

Unit 2: Calculating Net Products and GNP

2/1/17

Calculating Net Products

• Net domestic product: (GDP-Depreciation)
• Ne national products: (GNP-Net foreign factor)
• GNP: (GDP+ Net foreign factor payment)

- Depreciation:  The loss to value due to the " wear and tear" of capital equipment ,also known as consumption of fixed capital.

2/2/17

Gross Investment

• Gross investment= (Net Investment+ Depreciation)

2/3/17

• Nominal GDP- Value of output produced in current prices.

* Can increase from year to year if the output or price increases

• Real GDP- Value of output produced in constant based year prices. 

*Adjust for inflation , only increases when output increases.

• Nominal GDP: Current year PxQ

- In the base year real GDP and nominal GDP are equal
-In years after the base year nominal GDP will exceed real GDP
-In years before the base year real GDP will exceed the nominal GDP

Unit 2: Expenditure and Income Approach to GDP

1/31/17

Expenditure Approach

• Spending within the economy
• Expenditure Approach to GDP= C+Ig+G+Xn

Income Approach

• Money that flows within the economy 
• WRIP+Statistical adjustment 

*Keep in mind that both of these numbers are supposed to be the same*

2/1/17

Trade=(exports-imports)

• Positive=Surplus
• Negative=Deficit

Budget=Government purchases of goods and services+Government transfer payments-Government tax and fee collection

• Positive= Deficit
• Negative=Surplus

Calculating Income

1.  (Compensation of employees+ Rental income+Interest income+ Proprietors Income+ Corporate profits)
2.  GDP-Indirect business taxes- Depreciation- Net foreign factor payment

Calculating Disposable Income 

1. (National income- Personal household taxes+ Government transfer payments)

Unit 2: GDP and GNP

1/30/16

Gross Domestic Product (GDP) and Gross National Product (GNP)

• Gross domestic product- total value of all final goods and services produced within a country's borders.
• Gross national products- total value of all final goods and services produced by Americans in a given year
• GDP= C+Ig+G+Xn (exports-imports)

-C:(personal consumption) 67% of the economy is spent in this phase. This includes purchases of final and goods and services
-Ig: (gross private domestic investments) 18% of the economy; this includes new factory equipment, factory equipment maintenance, construction of housing, unsold inventory of products built in a year.
-G:(government spending) 18% of economy; government purchasing goods and services. Ex: School district buying school buses, Government buying weapons.
-Xn:(net exports) exports-imports; -2% of economy
 
Include in GDP        

• C
• Ig
• G
• Xn

Excluded from GDP

• Intermediate goods: Inputs used to produce final goods and services. Ex: tires, engine, windshield wiper)
• Avoid double counting and multiple counting.
• Used or second hand goods
• Stocks and bonds
• Gifts or transfer payments. Ex: Public or private scholarships, social security , unemployment, etc.
• Illegal activities. Ex: prostitution, black market
• Unreported business activity Ex: Tips
• Non market activity. Ex: volunteering, babysitting your brother)

Unit 1: Demand and supply

        1/09/17                                                          Demand and Supply  

• Demand- the quantity's that people are willing and able to buy at various prices.
• The law of demand- there is an inverse relationship between price and quantity demanded.

What causes a " change in quantity demanded"?

1. Change in number of buyers ( population)
2. Change in buyers taste ( preferences, advertisements)
3. Change in income 

- Normal goods- an increase in income causes an increase in dema
nd.
- Inferior goods- increase in income that causes a fall in demand.
     4. Change in price of related goods
- substitute good
- complementary good
     5. Change in expectation (future)

• Supply-  the quantities that producers or sellers are willing and able to produce and sell at various prices.
• The law of supply- there is a direct relationship between price and quantity supply.

What causes a " change in quantity supplied "?
                                              (Heres a link elaborating on the determinants of supply and demand)

1. Change in technology                     https://www.youtube.com/watch?v=jtypT1Ql2RY
2. Change in cost of production 
3. Change in weather
4. Change in number of sellers
5. Change taxes, subsides 
6. Change in expectations (future) 

1/12/17

Calculating Quantity and Price 

• Quantity = new quantity- old quantity/ old quantity 
• Price = new price- old price/ old price 
• Total revenue= price•quantity 

1/13/17

Calculating Supply 

• TVC+TVC=TC
• AFC+AVC=ATC
• TFC/Q=AFC
• TVC/Q=AVC
• TC/Q=ATC
• New TC-Old TC= MC

1/20/17

Excess Demand and  Excess Supply 

• Equilibrium-  Point at which the supply curve and demand curve intersect
• Excess demand-  occurs when the quantity demanded is greater than the quantity supplied (results in a shortage)
• Shortage-  when consumers can't get enough of the quantity  they desire .
• Price ceiling- this creates a shortage, it occurs when the government puts a legal limit on how high the price of a product can be. Ex: the government putting a price ceiling on flu shots 
• Excess supply -  when the quantity supply is greater than the quantity demanded creates a surplus.
• Price floor- lowest legal price a commodity can be sold at, this is usually used by the government in order to prevent prices from becoming to low . Ex: Minimum wage