Financial Assets- purchases of stocks and bondsGovernment Purchases- Federal, State, local gov’t on final goods/servicesTransfer payments- GOV’T spent NOT G/S (Social Security, insurance)Net Exports- Exports – Imports (NX = X – IM)Saving- Private saving, equal to all disposable incomeSpr = (Y – T) – CPublic Saving- equal to surplus of taxes over gov’t spendingSpu = T – GNational Saving- S, is equal to Spr + SpuS = Y – C – GMeasuring GDP (Output)Method 1: Add up market values of all final G/S producedMethod 2: Add up total amount spent by each of the four groups on final goods and services and subtracting spending on importsMethod 3: Incomes of capital and labor (whether sold or not)Revenue is earned by workers and owners of capitalGNP- labor income + capital incomeStock Variable- measure of an amount that exists at an instant of timeWealth, debt, savings, populationStocks vs. Flow-Snow Falling = Flow (Rate of snow fall)Snow Accumulation = Stock (Amount of snow that fell)Consumption- durable and non-durable goods, servicesIncome and OutputWhen output is produced, equal income is generatedFirms use flow of services (labor, land, capital) to produce outputWages and salaries, rent, interest, profile are earnedIncomes earned = OutputExpenditure = IncomeY = C + I + G + NXValue of production = income = expenditureLabor IncomeWagesSalariesIncomes of self-employedCapital IncomePayments relate to physical capital (factories, machines, offices)Profits of business ownersRent Paid to land or building ownersPayments on intangible capital (copyrights, patents)Nominal GDP-quantities produced valued at current-year pricesMeasures current dollar value of production, not adjusted inflationReal GDP-Measure of GDP where quantities produced are valued at the prices in a base year rather than at current pricesMeasures physical volume of productionOutput value adjusted for inflationMaterialisticThree Faces of GDPProduction (Market value of final G/S)Expenditure (Consumption, Investment, Gov’t purchases, exports)Income (Labor and Capital Income)UnemploymentIndicator of labor marketLow employment indicators includeJob securityJob AvailabilityImproving wages and working conditionsMeasuring UnemploymentThe Bureau of Labor Statistics and Bureau of the Census collect data60,000 random households. Everyone 16 or older is placed in three categories: Employed, Unemployed, Out of labor forceEmployed- work in last week or on vacationUnemployed- did not work during preceding week but made effort to find workOut of Labor Force- didn’t work for past week, didn’t look for work in last 4 weeks (students, retirees, disabled, unpaid homemakers, discouraged)Unemployment Rate= unemployed / labor forceLabor Force- Total # of employed and unemployed peopleLabor Force = employed + unemployedParticipation Rate% of working age population% of working-age population that is employed or looking for workParticipation Rate = Labor Force / Population 16 and overCosts of UnemploymentEconomic- income, gov’t supportPsychological- self-esteem, depressionSocial- increase in crime, alcohol and drug abuseLong term unemployed- 6 monthsHyperinflation- Prices rise 50% per month (extremely high)Effects of inflationOn measurementOn interpreting price changesOn economic performanceOn welfareOn Interest RatePurchasing Power- Real values depend on price (real = purchasing power)Real value of money declines when prices increaseFixed nominal (money) incomes decline in real value when prices riseMeasuring InflationGDP Deflator- index of prices obtained indirectly from calculation of real GDP, uses current-year quantities, broader, does not include measure of prices of imported goods, includes new goods and quality improvementsConsumer Price Index (CPI)- Measure of average prices paid by urban consumers for a fixed market basket of consumer goods and services relative to its cost in a base period.CPI = current cost of fixed basket DIVIDED BY base-year cost of fixed basketMeasures changes in cost of market basketUsed to eliminate effects of inflationReading CPI- defined to equal 100 for a period called the reference base periodReference base period- CPI is defined to equal 100 (1982-1984)Calculate Cost of basket- Prices x QuantityCalculate CPI- (New – Old) / Old = Rate of Inflation[Cost of CPI basket at current period prices / Cost of CPI basket at base period prices] x 100Find cost of CPI basket at base year pricesFind cost of CPI basket at current period pricesCalculate CPI for base period and current periodConstructing CPI3 stages- Selecting the CPI basket, conducting monthly price survey, calculate CPICPI Basket- Importance of items in CPI basket same as budget of householdCPI-U: Measures the average price paid by all urban householdsCPI-W: Measures average price paid by urban earners and clerical workersMonthly Price Survey- BLS employees check prices of 80,000 G/S in CPI basket in 30 areasDeflation- Prices are falling, inflation rate is negativeDisinflation- Prices are rising, but not as rapidly as they had been risingInflation- Black line is rising; red line above zeroDeflation- Black line falling; red line below zeroDisinflation- Black line rising; red line above zeroNominal quantity- measured in dollar valueReal value- measured in physical termsDeflating- Dividing nominal quantity by price index = real termsNominal Wage Rate- average hourly wage rate measured in dollarsReal Wage Rate- Average hourly wage rate measured in dollars in base yearCalculate real wage- Divide nominal wage by price index in CPIExample: Nominal Wage is $20,000 per year and price of a shmoo is $2,000/shmoo. Real Wage is 10 shmoos per year. If shmoo doubles in price, real wage will drop to 5 shmoos per yearBase year price is where Nominal and Real wages intersectReal GDP is nominal GDP deflated RGDP = (NGDP/P) * 100P is called the GDP deflatorCPI vs. GDP deflatorPrices of Capital GoodsIncluded in GDP deflator (only domestic)Excluded from CPIPrices of imported consumer goodsIncluded in CPIExcluded from GDP deflatorBasket of GoodsCPI: FixedGDP deflator: changes every yearIndexing- Increasing nominal quantity each period by amount equal to the % increase in a price index.Prevents purchasing power of nominal quantity from being eroded by inflationExamples: Social Security payments, federal income taxReal Income- purchasing power of nominal incomeEx: Both the $7000 last year and $9800 this year buy just 70 shmoos. Real income was the same for