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)