Unit Three: Investment Demand Graphs

Investment Demand Graph

Notes from 2/22/16

Real (r%) v. Nominal (i%) 

Difference: Nominal is the observable rate of interest, real subtracts out inflation (∏%) and is only known ex post facto

Real Interest Rate (r%) = i% - ∏%

What determines cost of an investment decision?

     -Real Interest Rate (r%)

Investment Demand Curve

Downward Sloping-  When investment rates are high, fewer investments are profitable

- When investment rates are low, more investments are profitable

Shifts in ID

• Cost of Production-
• Lower = Shift →
• Higher = Shift ← 
• Business Taxes
• Lower = Shift →
• Higher = Shift ← 
• Technological Changes
• New Technology = Shift → 
• Lack of Tech Change = Shift ←  
• Stock of Capital
• Economy Low on Capital = Shift →
• Economy With Much Capital = Shift←  
• Expectations
• Positive Expectations = Shift →
• Negative Expectations = Shift ← 

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Unit Three: Investment Demand

Investment Demand

Notes from 2/22/16

Investment?: Money Spent or Expenditures on:

     -New Plants (Factories)

     -Capital Equipment (Machinery)

     -Technology (Hardware and Software)

     -New Homes

     -Inventories (Goods Sold by Producers)

Expected Rates of Return

How do businesses make investment decisions?:

     -Cost/Benefit Analysis: How much is it going to cost me? What do I get out of it?

How do businesses determine the benefit?

     -Expected Rate of Return

How do businesses count the cost?

     -Interest Costs

How do businesses determine the amount of investment they undertake?

     -Compare expected rate of return

          -If Expected Return > Interest Cost THEN invest

          -If Expected Return < Interest Cost THEN DO NOT invest

Unit Three: AD and AS Graph Ranges

AS Graph Ranges

Keynesian (Recession): 

• Price- Fixed
• Wages- Fixed
• Employment Level- Flexible
• Implications- Output Depends on Changes in Employment Level

Intermediate:

• Prices- Flexible
• Wages- Fixed
• Employment Level- Flexible
• Implications- Output Depends on Changes in Price and Employment Level

Classical (Inflation):

• Price- Flexible
• Wages- Flexible
• Employment Level- Fixed
• Implications- Output is Independent of Changes in Price Level

VOCABULARY

• Nominal Wages: The amount of money received by a worker per unit of time (Paid by hour, day, etc.)
• Real Wages: The amount of goods and services a worker can purchase with their nominal wages
• Purchasing Power of Nominal Wages
• Sticky Wages: Nominal wage level is set according to an initial price level, and does NOT vary due to labor contracts or other restrictions

Unit Three: AD and AS Graphs

AD and AS Graphs

Notes from 2/19/16

Full Employment: Equilibrium exists where AD intersects SRAS and LRAS at the same point

Recessionary Gap: Exists when equilibrium occurs below full employment output

Inflationary Gap: Exists when equilibrium occurs beyond full employment output

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AD and AS Help!

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SO! Aggregate Demand and Aggregate Supply definitely confused me at first, but I found this relatively short video that goes over the AD, AS, and LRAS curves on a graph. It hits all the basic points to gain a basic understanding of the concept!

Click Here---------->   AD, AS, and LRAS Video

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Unit Three: Aggregate Supply

Aggregate Supply

Notes from 2/18/16

Aggregate Supply: The level of real GDP that firms will produce at each price level

Long Run Aggregate Supply (LRAS)

• Period of time where input prices are completely flexible and adjust to changes in the price level
• Level of real GDP supplied is independent of price level 
• Marks level of full employment in the economy (analogous to PPC)
• Since input prices are completely flexible, changes in price level don't change firm's real profits and therefore don't change firm's level of output.
• Means that LRAS is vertical at economy's level of full employment 

Short Run Aggregate Supply (SRAS)

• Period of time where input prices are sticky (hard to shift) and don't adjust to changes in the price level
• Level of real GDP supplied is directly related to price level
• Key to Understanding SRAS is Per Unit Cost of Production
• Per Unit Cost of Production = Total Input Cost / Total Output

Determinants of SRAS

1. Input Prices

• Domestic Resource Prices
• Wages (75% of all Business Costs)
• Cost of Capital (Money Necessary to Begin Business)
• Raw Materials
• Foreign Resource Prices
• Market Power
• Increase in Resource Prices = Shift ←
• Decrease in Resource Prices = Shift →

2. Productivity = Total Output / Total Input

• More Productivity = Lower Unit Production Cost = Shift →
• Less Productivity = Higher Unit Production Cost = Shift ←

3. Legal Institutional Government 

• Taxes and Subsidies
• Taxes (to government) on businesses increase per unit cost of production = Shift ←
• Subsidies (from government) to businesses to reduce per unit of production=
• Shift →
• Government Regulation
• Creates a cost of compliance = Shift ←
• Deregulation reduces compliance cost = Shift → 

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Unit Three: Aggregate Demand (Part Two)

Aggregate Demand

Notes from 2/12/16

Determinants of AD

1. Consumption: Household spending affected by-

1. Consumer Wealth 
1. More Wealth = More Spending = Shift → 
2. Less Wealth = Less Spending = Shift ←
2. Consumer Expectations
1. Positive Expectations = More Spending = Shift →  
2. Negative Expectations = Less Spending = Shift ←
3. Household Indebtedness
1. Less Debt = More Spending = Shift → 
2. More Debt = Less Spending = Shift ←
4. Taxes
1. Less Taxes = More Spending = Shift →  
2. More Taxes = Less Spending = Shift ←

2. Gross Private Domestic Product: Investment spending is sensitive to-

1. Real Interest Rate
1. Low Rate = More Investment = Shift → 
2. High Rate = Less Investment = Shift ← 
2. Expected Returns 
1. Higher Expected Rate = More Investment = Shift → 
2. Lower Expected Rate = Less Investment = Shift ←

• Influenced by: Expectations of Future Profitability, Technology, Business Taxes
• Degrees of Excess Capacity (Existing Stock of Capital) 

3. Government Spending

1. More Spending = Shift → 
2. Less Spending = Shift ←

4. Net Exports: Sensitive to-

1. Exchange Rates (International Value of Dollar)
1. Strong $ = More Imports, Fewer Exports = Shift ← 
2. Weak $ = Less Imports, More Exports = Shift →
2. Relative Income
1. Strong Foreign Economies = More Exports = Shift → 
2. Weak Foreign Economies = Less Exports =Shift ←

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Unit Three: Aggregate Demand (Part One)

Aggregate Demand

• Notes from 2/12/16

Aggregate Demand- The demand by consumers, businesses, government, and foreign countries

AD= C + Ig + G + Xn

What Doesn't Shift the Curve?: ∆ in Price Level

Why is AD downward Sloping?

• Real Balance Effect: Higher price levels reduce the purchasing power of money
• This decreases the quantity of expenditures
• Lower price levels increase purchasing power and increase expenditures
• Ex. - If  you have $50,000 in your bank account, but inflation erodes your purchasing power, you will likely reduce your spending

• Interest Rate Effect: When price level increases, lenders need to charge higher interest rates to get a REAL return on their loans
• Higher interest rates discourage consumer spending and business investments.

• Foreign Trade Effect: When U.S. price level rises, foreign buyers purchase fewer goods and Americans buy more foreign goods.
• Exports fall and imports rise causing real GDP demanded to fall (Xn decrease)
• Ex. - If prices triple in U.S., Canada will no longer buy U.S. goods, causing quantity demanded of U.S. products to fall. 

Shifters of AD

GDP= C + Ig + G + XN

2 Parts

1.  A Change in C, Ig, G, or Xn
2.  A multiplier effect that produces a greater change than the original change in the 4 components

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Unit Two: Chapter 19- Unemployment (Part Two)

Unemployment

Notes from (2/5/16 and 2/8/16)

GDP Gap- The amount by which actual GDP falls short or potential GDP 

(ARU - NRU) x 2 = GDP Gap

Okun's Law- For every 1% by which actual unemployment rate exceeds the natural rate of unemployment (NRU), a GDP Gap of about 2% occurs

Rule of 70- Used to determine how many years it will take for a value to double given a particular annual growth rate

Example: You put $20,000 in the bank and earns a yearly interest rate of 7%. How many years will it take for your income to double?

70 divided by the 7% interest rate = 10 years


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Unit Two: Chapter 19- Unemployment

Unemployment

Notes from (2/4/16)

Unemployment- The failure to use available resources, particularly labor to produce desired goods and services

Labor Force- Above 16 years of age, Able and willing to work

NOT Labor Force- Military, Mental Institution Patients, Jail/ Prison, Retired, Students, Homemakers, Those not Looking for a Job

Standard Unemployment Rate- 4-5%, Means Full Employment or Natural Rate of Unemployment (NRU) 

                                                                # of Unmployed

                                              --------------------------------------------------  x  100       

                                                # of Unemployed + # of Employed

TYPES OF UNEMPLOYMENT

• Frictional- People who are searching for a job
• Temporarily unemployed
• In between jobs
• Have Transferable Skills
• Ex- High School/ College Grad looking for a Job, Leaving one Job to Look for a Better One
• Inevitable, NRU
• Structural- Changes in the structure of the labor force make some skills obsolete
• No Transferable Skills 
• Ex- VCR Repair Man
• Inevitable, NRU
• Seasonal- Due to the time of the year and nature of the job
• Ex- Lifeguards, Santa Claus, Easter Bunny, School Bus Drivers, Construction Workers 
• Cyclical- Unemployment that results from economic downturns
• Ex- A recession
• As demand for goods and services fall, demand for labor falls, thus workers are laid off
• Full Employment = No Cyclical Unemployment

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Unit Two: Chapter 19- Interest Rates

Interest Rates

Notes from (2/2/16)

Real Interest Rate- The percent increase in purchasing power the borrower must pay the lender for a loan

- Adjusted for inflation

-Unanticipated Inflation

Nominal Interest Rate - Inflation

(Always less than 10)

Nominal Interest Rate- The percent in money the borrower must pay the lender for a loan 

- Not adjusted for inflation

-Anticipated Inflation (Fisher Effect)

Expected Interest Rate + Inflation Premium

Hurt and Helped by Inflation?

Hurt- Savers, Lenders/ Creditors, Those on Fixed Incomes

Helped- Borrowers

COLA- Cost of Living Adjustments- Gives automatic wage increases when inflation occurs


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Unit Two: Chapter 19- Real and Nominal GDP

Real and Nominal GDP

Notes from (1/29/16)

Nominal GDP- The value of output produced in current prices 
     -Can increase from year to year (either price or output increases)
     -Inflation measurements 
     - Nominal GDP = Price x Quantity

Real GDP- The value of output produced in constant base year prices
     -Quantity changes
     -Can only increase from year to year ONLY if output increases
     -Used to measure economic growth
     -Adjusted for inflation
     -Real GDP = Base Year Price x Current Year Quantity

GDP Deflator- Price index used to adjust from nominal to real GDP
     
     - (Nominal GDP / Real GDP) x 100 

-In the base year, will ALWAYS equal 100
-In years after base year, will be greater than 100
-In years before base year, will be less than 100

Consumer Price Index (CPI)- Most commonly used measurement of inflation

(Price of  market basket in a particular year / Price of market basket in base year) x 100

Inflation =  [ (GDP Deflator in new or current year - GDP Deflator in old or base year) / 
                                                       GDP Deflator in old year ] x 100


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Unit Two: Chapter 19- GDP (Part Two)

GDP

Notes from (1/29/16)

Two Ways to Calculate GDP

1. Expenditure Approach
2. Income Approach

Expenditure Approach- Add up all the spending on final goods and services produced in a given year 

C + Ig + G + Xn

Income Approach- Add up all of the income that resulted from selling all final goods and services produced in a given year

     -Rarely used because people lie about their income

W (wages) + R (rent) + i (interest) + P (profits) + Statistical Adjustments

VOCABULARY

Compensation of Employees- Includes the wages, salaries, fringe benefits, Social Security contributions, and health and pension plans

Rent- The income of the property owner

Interest- The income from investments

Corporate Profits- The income of the corporation stockholders

Proprietor's Income- Income of entrepreneurship's or partners

Need to Know Formulas

Budget = Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collection

     -  + means Deficit, - means Surplus

Trade = Exports - Imports

     - + means Surplus, - means Deficit

National Income- Two Formulas!

1. Compensation of Employees + Rental Income (Rent) + Interest Income (Interest) + Corporate Profits + Proprietor's Income
2. GDP - Indirect Business Taxes - Depreciation- Net Foreign Factor Payments

Disposable Personal Income = National Income - Personal Household Taxes + Government Transfer Payments

GNP = GDP + Net Foreign Factor Payments

Net Domestic Product = GDP - Depreciation

Net National Product = GNP - Depreciation 


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Unit Two: Chapter 19- GDP (Part One)

GDP

Notes from (1/28/16)

GDP- Gross Domestic Product- The total market value of all final goods and services produced in a country's borders within a given year

GNP- Gross National Product- Total market value of all final goods and services by citizens of that country on its land or foreign land

INCLUDED:

C- Personal Consumption Expenditures- Whatever you want to spend money on, 65%

IG- Gross Private Domestic Product- Factory Equipment and Maintenance, Construction of Houses, Unsold Inventory of Products Built in a Year, 17%

G- Government Spending- Goods and Services bought by the government, 20%

Xn- Net Exports- Exports - Imports, -2%

C + Ig + G + Xn = GDP (Expenditure Approach)

EXCLUDED:

• Intermediate Goods- A good that requires further processing before it is ready for final use
• Used/ Secondhand Goods- Avoids DOUBLE COUNTING
• Purely Financial Transactions- (Stocks and Bonds)
• Illegal Activity- (Drugs)
• Unreported Business Activity- (Unreported tips)
• Transfer Payments
• Public- Social Security, Welfare
• Private- Scholarships
• Non-market Activity- Volunteering, Babysitting, and work performed for oneself

This was just the basics ;)

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Circular Flow Help!

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Alrighty! So I know that when we went over Circular Flow I was definitely a little confused and I hope I wasn't the only one. If not, then I found this short, sweet, and to the point video (compared to the other ones I saw) that breaks down the diagram. 

Click here for the link-----------------> Circular Flow Video

Hope this helps! :)


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Unit Two: Circular Flow

Circular Flow

Notes from (1/27/16)

Circular Diagram- Represents transactions in an economy 

Theres 2 Main Markets:

1. Product Market: Where households buy resources and firms sell resources

     -Always has goods and services flowing through

2. Resource/Factor Market: Where firms buy resources and households sell resources

     -Examples- Land, Labor, Capital, and Entrepreneurship

-Firms: Organization that produces goods and services for sale, Sells finished products to households

-Households: Person or group of people that share their income, Sells factors of production to businesses

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