5/10/17: Comparative & Absolute Advantage

• Specialization
• Individuals & countries can be made better off if they will produce in what they have comparative advantage & then trade with others for whatever else they want or need.
• Absolute & Comparative Advantage
• Absolute Advantage-
• The producer that can produce the most output or requires the least amount of input (resources.)
• Comparative Advantage-
• The producer with the lowest opportunity cost
• Countries should trade if they have relatively lower opportunity costs.
• They should specialize in the good that is "cheaper" for them to produce.

• Distinguish Input from Output Problems
• Output Problem- Presents the data as products produced given a set of resources. 
• Ex) Number of pens produced
• 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 absolute advantage, input problems change the scenario from who can produce the most to who can produce a given product with the least amount of resources.

5/8/17: Mechanics of Foreign Exchange

• Foreign Exchange-
• The buying & selling of currency.
• Any transaction that occurs in the Balance of Payments necessitates foreign exchange.
• The exchange rate (e) is determined by the foreign currency markets.
• Ex) Current exchange rate is approx. 8 yuan to 1 dollar.
• Simply put, the exchange rate is the price of a currency. 
• Changes in Exchange Rate-
• Exchange rates (e) are a function of the supply & demand for currency.
• An increase in the supply of a currency will decrease the exchange rate of a currency.
• Decrease in demand of currency will decrease exchange rate of a currency.
• Increase in demand of currency will increase exchange rate of a currency.
• Decrease in supply of a currency will increase the exchange rate of a currency.

• Appreciation & Depreciation-
• Appreciation: When the exchange rate increases.
• Depreciation: When the exchange rate decreases.
• Ex) Changing euros to dollars will increase demand for dollars, causing dollars to appreciate & euros to depreciate.

• Exchange Rate Determinants-
• Consumer Taste
• Relative Income
• Relative Price Level
• Speculation

5/4/17: Balance of Payments

• Balance of Payments-
• Measure of money inflows and outflows between the United State and the Rest of The World (ROW.)
• Inflows are referred to as DEBITS
• Outflows are referred to as DEBITS

• The Balance of Payments is divided into 3 accounts
• Current Account
• Capital/Financial Account
• Official Reserves Account
• Current Account-
• Balance of Trade or Net Exports
• Exports of goods/services- import of goods/services
• Exports create a credit to the balance of payments
• Imports create a debit to the balance of payments
• Net Foreign Income
• Income earned by the U.S owned foreign assets- income paid to foreign held U.S assets.
• Ex)Interest payments on U.S owned Brazilian bonds- interest payments on German owned U.S treasury bonds.
• Net Transfers (tend to be unilateral)
• Foreign Aid- A debit to the current account.
• Ex) Mexican migrant workers send money to family in Mexico.
• Capital/Financial Account-
• Balance of capital ownership
• Includes the purchase of both real & financial assets
• Direct investment in the United States is a credit to the Capital Account.
• Ex) Toyota factory in San Antonio
• Direct investment by U.S firms/individuals in a foreign country are debits to the Capital Account.
• Ex) Intel factory in San Jose, Costa Rica
• Purchase of foreign financial assets represents a debit to the Capital Account.
• Ex) Warren Buffet buys stocks in Petrochina
• Purchase of domestic financial assets by foreigners.
• The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ.
• Official Reserves-
• Foreign currency holdings of the U.S Federal Reserve System.
• When there is a balance of payments surplus, the Fed accumulates foreign currency & debits the balance of payments.
• When there is a balance of payments deficit, the Fed depletes its reserves of foreign currency & credits the balance of payments.
• The official reserves zero out the balance of payments.

Formulas-

1. Balance of Trade-
• Net Exports Formula: Exports (-) Imports
2. Balance of Goods-
• Goods Exports + Service Exports (-) Goods Imports + Service Imports
3. Balance on Current Account-
• Balance of goods & services + Net Investments + Net Transfers
4. Balance on Capital Account-
• Domestic/Foreign Purchase
5. Official Reserves-
• Current Accounts (+, -) + Capital Account (-, +) = 0 (theoretically)

4/24/17: Laffer Cruve/Supply Side Economics/Reaganomics

• Supply Side Economics or Reaganomics-
• Manipulating aggregate supply by enacting policies to stimulate incentives to work, save & invest.
• May include tax cuts, which would increase disposable income.
• Laffer Curve-
• Displays the theoretical relationship between tax rates & government revenue.

• 3 Criticisms of the Laffer Curve-
1.  Imperial evidence suggests that the impact of tax rates on incentives to work, save & invest are small.
2. Tax cuts also increase demand, which can fuel inflation.
3. Where the economy is actually located on the curve, is difficult to determine.

4/20/17: Types of Inflation

• Inflation-
• Increase in level of prices
• Ideal inflation rate is 2-3%
• Deflation-
• Decrease in level of prices
• Disinflation-
• Rate of inflation decreases
• Hyperinflation-
• Rate of inflation increases

                                          

4/18/17: Phillips Curve

• Short Run Phillips Curve-
• In the short-run, the Phillips curve represents a trade off between inflation & unemployment.
• Inverse relationship (as inflation increases, unemployment decreases)
• Each point on the Phillips curve corresponds to a  different level of output.

• Long-Run Phillips Curve- 
• Occurs at natural rate of unemployment
• Represented by a vertical line
• There is no trade-off between inflation & unemployment in the long-run.
• In the long-run, the economy produces at the full employment output level.
• the LRPC (long-run phillips curve) will only shift if the LRAS curve shifts. 
• Increase in unemployment (Un) will shift LRPC right.
• Decrease in unemployment will shift LRPC left.

• Short-run-
• If inflation persists & the expected rate of inflation rises, then the entire SRPC moves upwards.
• Brings about stagflation
• Stagflation-
• Simultaneous rise in inflation & unemployment.
• Supply Shocks-
• Rapid & significant increase in resource cost, which causes SRAS curve to shift.
• Ex) Depreciation of dollar, gas price increase
• If inflation expectations drop due to new technology, then the SRPC will move downward.
• Natural Rate of Unemployment related to...
• Frictional 
• Seasonal
• Structural 
• Misery Index-
• Combination of inflation & unemployment in any given year.
• Single digit misery is good

Monetary Policy Video

4/3/17: Loanable Funds Market

• Loanable Funds Market
• The loanable funds market is the private sector supply & demand of loans.
• This market brings together those who want to lend money (savers) & those who want to borrow (firms w/ investment spending projects)
• This market shows the effect on real interest rate
• Demand: Inverse relationship between real interest rate & quantity loans demanded.
• Supply: Direct relationship between real interest rate & quantity loans supplied.
• This is NOT the same as the money market (supply is not vertical).

• Prime Rate
• Interest rate that banks charge their most credit worthy customers.


• Better credit, better rate

3/31/17: Tools of Monetary Policy

• Tools of Monetary Policy
1. Open market operation
2. Reserve requirement 

• The Reserve Requirement
• The FED sets the amount that banks must hold
• Reserve ratio is the percent of deposit that banks must hold in reserve (% they can NOT loan out)

• Money Multiplier
• If triple R is .2, MM= 5
• Used to find change in money supply, change in DD.

• Using Reserve Requirement
• For Recessions
• Decrease the reserve ratio
1. Banks hold less money & have more excess reserves.
2. Banks create more money by loaning out excess.
3. Money supply increases, interest rates fall, AD goes up.
• RR down, MS up, I up, i down, AD up
• For Inflation
• Increase the reserve ratio
1. Banks hold more money & have less excess reserves.
2. Banks create less money.
3. Money supply decreases, interest rates up, AD down.
1. RR up, MS down, I down, i up, AD down

• Open Market Operations (OMO)
• FED buys or sells government bonds (securities)
• This is the most important & widely used monetary policy.
• If the  FED buys bonds: it takes bonds out of the economy & replaces them with money.
• MS up
• If the FED sells bonds: it takes money & gives the security to the investor.
• MS down

• The Discount Rate
• The discount rate is the interest rate that the FED charges commercial banks for short term loans.
• Federal Funds Rate
• The federal funds rate is the interest rate that banks charge one another for overnight loans.

3/24/17: Money Creation Formula

• A single bank can create $ by the amount of its excess reserves.
• The banking system as a whole can create $ by a multiple of the excess reserves.
• MM x ER = Expansion of Money
• Money Multiplier = 1 / RR (required reserves)

• New vs. Existing $
• New Money
• If the initial deposit in a bank comes from the FED or 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 = Initial deposit is new $ = Deposit + $ Created by banking system
• Existing Money
• If a deposit in a bank is existing $ (already counted in MI. Ex: currency or checks) 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 they money supply from coins/paper money to checking account deposits. 



• Total change in MS if deposit is existing money = Banking system created money only.

3/23/17: Fractional Reserve System

• Demand deposits are created through the fractional reserve system.
• Fractional Reserve System
• Process in which banks hold a small portion of their deposits in reserves & loan out the excess.

• Total Reserves/Actual Reserves
• TR or AR = Required Reserves (RR) + Excess Reserves (ER)
• Required Reserves
• Cash that banks keep on hand.
• Excess Reserves
• Loans; the bank lends out.

3/22/17: The Money Market (Supply & Demand for Money)

• Demand for money has an inverse relationship between nominal interest rate & the quantity of money demanded.

1. What happens to the quantity demanded of money when interest rates increase?
• Quantity demanded falls bc individuals would prefer to have interest earning assets instead of borrowed liabilities.
2. What happens to the quantity demanded when interest rates decrease?
•  Quantity demanded increases. There is no incentive to convert cash into interest earning assets.

• Money Demand Shifters
1. Changes in Price Level
2. Change in Income
3. Change in taxation that affect investment

• Increasing Money Supply
• If the FED increases the money supply, a temporary surplus of money will occur at 5% interest.
• The surplus will cause the interest rate to fall to 2%

3/22/17: Bonds & Stocks

• Bonds are loans. Stocks you own.

• Bonds-
• Loans that represents debt that the government or a corporation must repay to an investor.
• The bondholder has NO ownership of the company.
• If a corporation issues & then sells a bond, it is a liability
• It's an asset for the buyer
• NIR (Nominal Interest Rate)
• NIR Up = Decrease in value of bonds
• NIR Down = Increase in value of bonds
• Socks owners can earn a profit in 2 ways
1. Dividends, which are portions of a corporation's profits, are paid out to stockholders.
• Higher corporate profit, higher dividend
2. Capital gain is earned when a stockholder sells stock for more than he or she paid for it.
• A stockholder that sells stock at a lower price than the purchase price suffers capital loss.
• Federal Reserve Bank = FED = Capital Bank
• Goals of FED



• Maintain economy
• Full employment

3/20/17: Money

• The Barter System
• Goods & services are traded directly. There is no money exchanged.
• What is Money?
• Anything that is generally accepted in payment for goods & services.
• Money is NOT the same as wealth & income.
• Wealth is a total collection of assets that store value.
• Income is a flow off earnings per unit of time.
• Money Can Be Used as a
1. Medium of Exchange
• Buy goods & services 
2. Unit of Account
• Measuring the value of goods & services
3. Store of Value 

                                 

• 3 Types of Money
• Representative Money
• Money that represents something of value
• IOU's
• Commodity Money
• Something that performs the function of money & has alternative uses.
• Salt, gold, silver & cigarettes
• Fiat Money
• Money because government says so
• Coins, paper money
• Six Characteristics of Money
1. Durable
2. Portability
3. Divisibility
4. Uniformity
5. Limited Supply
6. Acceptability
7. 
   
• 3 Types of Money Supply
• Liquidity
• Ease with which an asset can be accessed and converted into cash (liquidized)
1. M1 (high liquidity)- 
• Coins, currency, and checks 
• Personal & corporate checking accounts which are the largest components of M1.
• In general, this is the money supply
2. M2 (medium liquidity)-
• M1 plus savings deposits (money market accounts)
• Time deposits (CD's: Certificates of deposit)
3. M3 (low liquidity)-
• M2 plus time deposits above $100k

3/6/17: Fiscal Policy

• How does the Government stabilize the economy?
• The government has two different tool boxes it can use:
1. Fiscal Policy
• Actions by congress to stabilize the economy.
• Changes the expenditures or tax revenues of the federal government.
2. Monetary Policy
• Actions by the Federal Reserve Bank to stabilize the economy. 
• Two Tools of Fiscal Policy
• Taxes: Government can increase or decrease taxes.
• Spending: Government can increase or decrease spending.
• Fiscal Policy is enacted to promote our nation's economic goals..
• Full employment
• Price stability
• Economic growth
• Deficits, Surpluses & Debt
• Balanced Budget
• Revenues = Expenditures
• Budget Deficit
• Revenues < Expenditures
• Budget Surplus
• Revenues > Expenditures
• Government Debt
• Sum of all Deficit - Sum of all Surpluses
• Government must borrow money when it runs a budget deficit.
• Government borrows money from..
• Individuals
• Corporations
• Financial Institutions
• Foreign entities or Foreign governments
• Fiscal Policy Two Options
• Discretionary Fiscal Policy (Action)
• Expansionary fiscal policy- think deficit
• Contractionary fiscal policy- think surplus
• Non-Discretionary Fiscal Policy (No Action)
• Three Types of Taxes
1. Progressive Taxes
• Takes a larger percent of income from high income groups (taxes more from rich people)
• Ex) Current federal income tax system.
2. Proportional Taxes (Flat rate)
• Takes the same percent of income taxes from all income groups.
• Ex) 20% flat income tax on al income groups. 
3. Regressive Taxes
• Takes a larger percentage from low income groups (poor people).
• Ex) Sales tax; any consumer tax.

• Contractionary Fiscal Policy (Break- Close inflation gap)
• Laws that reduce inflation & decrease GDP
• Decrease government spending
• Tax increases
• Combinations of the two
• Expansionary Fiscal Policy (Gas- Close recession gap)
• Laws that reduce unemployment & increase GDP
• Increase government spending
• Decrease taxes on consumers

• Automatic or Built-in Stabilizers
• Anything that increases the governments budget deficit during a recession & increases its budget surplus during inflation w/o requiring explicit action by policymakers. 
• Transfer Payments
• Welfare
• Food stamps
• Unemployment checks
• Corporate dividends
• Social Security 
• Veterans benefits

2/24/17: Multipliers

• The 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 
• Multiplier = Change in AD / Change in C, Ig, G or Xn
• Why does this happen?
• Expenditures and income 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 the MPS.
• Multiplier = 1 / 1-MPC or 1 / MPS
• Multipliers are positive (+) when there is an increase in spending & negative (-) when there is a decrease.

• Calculating the Tax Multiplier
• When the government taxes, the multiplier works in reverse.
• Why?
• Because now money is leaving circular flow.
• Tax Multiplier (Note: it's negative)
• -MPC / 1-MPC or -MPC / MPS
• If there is a tax cut, then the multiplier is positive (+) now, because there is now more money in the circular flow. 

2/23/17: Consumption & Savings

• Disposable Income (DI)
• Income after taxes or net income
• DI = Gross income - Taxes
• 2 Choices
• With disposable income, households can either
• Consume (spend money on goods & services)
• Save (not spend money on goods & services)
• Consumption
• Household spending
• The ability to consume is contained by
• The amount of disposable income
• The propensity to save
• Do households consume if DI = 0?
• Autonomous consumption
• Dissaving
• Saving 
• Household NOT spending
• The ability to save is constrained by
• The amount of disposable income 
• The propensity to consume  
• Do households save if DI = 0?
• No
• APC & APS (Average Propensity to Consume & Average Propensity to Save)
• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 = Dissaving
• -APS = Dissaving

• MPC & MPS
• Marginal Propensity to Consume
• Change in Consumption / Change in DI
• % of every extra dollar earned that is spent.
• Marginal Propensity to Save
• Change in Savings / Change in DI
• % of every extra dollar earned that is saved
• MPC + MPS = 1
• 1 - MPC = MPS
• 1 - MPS = MPC

• Determinants of Consumption & Savings 
• Wealth
• Expectations
• Household debts
• Taxes

2/21/17: AS & AD

• The AS/AD Model
• The equilibrium of AS & AD determines current output (GDPr) and the price level (PL).
• Full Employment 
• Equilibrium exists where AD intersects SRAS & LRAS at the same point.
• Inflationary Gap
• Output if high & unemployment is less than NRU
• Actual GDP is above potential GDP

• Recessionary Gap
• Output low & unemployment is more than NRU

2/21/17: Aggregate Supply

• Aggregate Supply
• Level of real GDP that firms will produce at each level.
• Long-run
• Period of time were input prices are completely flexible and adjust to changes in the price level.
• In the long run, the level of real GDP supplied is independent of the price level.
• 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 real GDP supplied is directly related to the price level.
• Long Run Aggregate Supply (LRAS)
• Analogous to PPC
• Marks level of full employment in the economy 
• Short Run Aggregate Supply (SRAS)
• Because input prices are sticky in the short-run, the SRAS

• Changes in SRAS
• An increase in SRAS is seen as a shift to the right
• A decree in SRAS is seen as a shift to the left
• The key to understanding shifts in the SRAS is per unit cost of production 
• Per unit production cost = Total input cost / Total output

• Determinants of SRAS
• Input prices
• Productivity
• Legal Institutional Environment
• Input Prices
• Domestic Input Prices
• Wages (75% of all business costs)
• Cost of capital
• Raw materials (Commodity prices)
• Foreign Input Prices
• String $ = Lower foreign resource prices
• Weak $ = Higher foreign resource prices
• Market Power
• Monopolies & cartels that control resources control the price of those resources
• Increase in Resource Prices = SRAR shift left
• Decrease in Resource Prices = SRAS shift right
• Productivity
• Total Output / Total Input
• More productivity = Lower unit production cost
• SRAS shift right
• More productivity = Higher unit of production cost
• SRAS shift right
• Legal Institutional Environment
• Taxes & Subsidies
• Taxes ($ to gov't) on business increase per unit production cost = SRAS shift left 
• Subsidies ($ from gov't) to business price per unit of production cost = SRAS shift right
• Government Regulation
• Government regulation creates a cost of compliance = SRAS shift left
• Deregulation reduces compliance costs = SRAS shift right 

2/16/17: Interest Rates & Investment Demand

• Investment 
• Money spend or expenditures on:
• New plants (factories)
• Capital equipment (machinery)
• Technology (hardware & software)
• New Homes
• Inventories (goods sold by producers)
• Expected Rates of Return
• How does business make investment decisions?
• Cost/benefit analysis
• How does business determine the benefits?
• Expected rate of return
• How does business count the cost?
• Interest cost
• How does business determine the amount of investment they undertake?
• Compare expected rate of return to interest cost 
• If expected return > interest cost = Investment
• If expected return < interest cost = Don't invest
• Real & Nominal
• r% (real) = i% (nominal) - π% (inflation)
• What then determines the cost of an investment decision?
• The real interest rate
• Investment Demand Curve
• What is the shape of investment demand curve?
• Downward sloping 
• Why?
• When interest rates are high, fewer investments are profitable.
• When interest rates are low, more investments are profitable. 



• Shifts in Investment Demand (ID)
• Cost of production
• Business taxes
• Technological change
• Stock of capital
• Expectations

                                                

2/15/17: Aggregate Demand

• Aggregate Demand Curve
• AD is the demand by consumers, businesses, government, and foreign countries.
• Changes in price level cause a move along the curve, not a shift of the curve. 
• Aggregate Demand (AD)
• Shows the amount of real GDP that the private, public & foreign sector collectively desire to purchase at each possible price level.
• The relationship between the price level & the level of real GDP is inverse (one decreases, other increases.)

1. 3 Reasons why AD is downward sloping
1. Wealth Effect
• Higher prices reduce purchasing power of $
• This decreases the quantity of expenditures
• Lower price levels increase purchasing power & increase expenditures
• Price level goes up, GDP demand goes down
• Ex) If balance in your bank is $50,000, but inflation erodes your purchasing power you will likely reduce your spending 

               2. Interest Rate Effect

• As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans.
• Higher interest rates discourage consumer spending & business investment.
• Price level goes up, GDP down (& vice versa)
• Ex) Increase in price leads to an increase in the interest rate from 5% to 25%. You are less likely to take out loans to improve your business. 

               3. Foreign Trade Effect

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

• Shifts in Aggregate Demand 
• There are two parts to a shift in AD
• A chance in C, Ig, G, and Xn
• A multiplier effect that produces a greater change than the original change in the 4 components.
• Increases in AD = AD shift to the right
• Decreases in AD = AD shift to the left

• Determinants of AD
• Consumption (C)
• Gross private domestic income (Ig)
• Government purchases (G)
• Net exports (Xn)

1. Change in Consumer Spending
• Consumer wealth (boom in the stock market)
• Consumer expectations (people fear a recession)
• Household indebtedness (more consumer debt)
• Taxes (decrease in income taxes)
2. Change in Investment Spending
• Real interest rates (price of borrowing $)
• If interest rates increase..
• If interests rates decrease..
• Future business expectations (high expectations..)
• Productivity & technology (new robots)
• Business taxes
3. Change in Government Spending
• War
• Nationalized health care
• Decrease in defense spending
4. Change in Net Exports
• Exchange rates (if the U.S dollar depreciates relative to the euro)
• National income compare to abroad
• If a major importer has a recession
• If the U.S has a recession
• "If the U.S gets a cold, Canada gets pneumonia" 

• AD = GDP = C + Ig + G + Xn
• Government Spending
• More government spending = AD shift to right
• Less government spending = AD shift to right

2/9/17: What is Unemployment?

• Unemployment
• The percent of people in the labor force who want a job but are not working.

• Labor Force
• # of people in a country that are classified as either employed or unemployed.
• Employed
• Anyone who works at least 1 hour a month.
• Anyone considered temporarily absent from work.
• Part-time workers
• Those who are NOT in the labor force
• Kids
• Full-time students
• People in mental institutions
• Military personnel
• Stay at home moms & dads
• Retirees
• People who are incarcerated
• Discouraged workers (mentally & psychologically beaten down)
• Unemployment Rate
• # of Unemployed / # in Labor Force (employed + unemployed) x 100
• Standard Unemployment Rate
• 4 to 5%
• Higher than 5 = recession
• 4 Types of Unemployment
1. Frictional Unemployment
• "Temporarily unemplyed" or being between jobs
• Individuals are qualified workers with transferable skills but they aren't working.
2.  Seasonal Unemployment
• This is a specific type of frictional unemployment which is due to time of year & the nature of the job.
• These jobs will come back
3.  Structural Unemployment
• Changes in the structure of the labor force make some skills absolete.
• Workers do NOT have transferable skills & these jobs will never come back.
• The Permanent loss of these jobs is called "creative destruction" (new replaces old) 
4. Cyclical Unemployment
• Unemployment that results from economic downturns (recessions)
• As demand for goods & services falls

• Natural Rate of Unemployment (Full Employment)
• Frictional + Structural = NRU (4 to 5 %)

• Full employment means NO cyclical unemployment

• Okun's Law
• When unemployment rises 1 % above the natural rate, GDP falls by about 2%.

2/6/17: Inflation

• Inflation
• General rise of level of prices
• It reduces the "purchasing power" of money
• ex) It takes $2 to buy today what $1 bought in 1982.

• Three Causes of Inflation 
1. Printing too much money (The Quantity Theory)
2. Demand-Pull Inflation
• Caused by excess of demand over output, that pulls prices upward.
• "too many dollars chasing too few goods"
3. Cost-Push Inflation
• Higher production cost increases prices.
• Standard Inflation Rate
• 2 to 3 %
• Formula for Inflation Rate
• (Current year price index - Base year price index) / Base year price index x 100
• Rule of 70
• Used to calculate the # of years it will take for the price level to double at any given rate of inflation.
• 70 / Annual Inflation Rate
• Deflation
• General decline in the price level.
• Disinflation
• Occurs when the inflation rate declines.

• Real Interest Rate
• The percentage increase in purchasing power that a borrower pays to the lender (adjusted for inflation)
• Real = Nominal interest rate - Expected inflation 
• Nominal Interest Rate
• The percentage increase in money that the borrower pays back to the lender not adjusting for inflation.
• Unanticipated Inflation
• Hurt by inflation
• Lenders: People who lend money (at fixed interest rate)
• People with fixed income
• Savers
• Helped by Inflation
• Borrowers: People who borrow money
• A business where the price of the product increases faster than the price of resources.

2/3/17: Real & Nominal GDP

• Nominal GDP
• The value of output produced in current prices.
• Can increase from year to year if either output or prices increase.
• P x Q (Price x Quantity)
• Real GDP
• Value of output produced in constant base year prices.
• Adjusted for inflation
• Can increase from year to year only if output increases
• P x Q (Price x Quantity of Base Year)

• Only in base year is Real GDP = to Nominal GDP
• In years after base year, Nominal GDP > Real GDP
• In years before base year, Real GDP > Nominal GDP

• GDP Deflator
• Price index used to adjust from Nominal to Real GDP
• Nominal GDP / Real GDP x 100
• CPI (Consumer Price Index)
• Measures inflation by taking changes in the price of a market basket of goods.
• Price of Market in Current Year / Price of Market in Base Year x 100

1/27/17: GDP & GNP

• Gross Domestic Product (GDP)
• Total value of all final goods & services produced within a country's borders in a given year.
• Includes all production or income earned within the U.S by U.S & foreign producers.
• Excludes production outside the U.S even by Americans.
• Gross National Product (GNP)
• Total value of all goods & services produced by Americans in a given year.
• Includes production or income earned by Americans anywhere in the world. 
• Excludes production by Americans even in the U.S
• GDP
• C + Ig + G + Xn
• Consumption
• Purchases of goods & services (final)
• 67% of economy
• Ig (Gross Private Domestic Investment)
• Construction of new housing, new factory equipment, factory equipment maintenance, unsold inventory of products built in a year.
• 17% of economy
• G (Government Spending)
• 18% of economy
• ex) school buses, highways

• Xn (Net Exports)
• Exports - Imports
• -2% of economy

• Included in GDP-
1. C
2. Ig
3. G
4. Xn
• Excluded from GDP-
1. Intermediate goods (avoid double or multiple counting)
2. Used or secondhand goods (avoid double counting)
3. Unreported business activities (tips)
4. Stocks & bonds
5. Non-market activity
6. Illegal Activities (underground/black market- prostitution, drugs)
7. Gifts or transferred payments (public or private) ex- scholarships, social security, unemployment.
• Stocks & Bonds
• Purely financial transaction, nothing is being produced.
• Net Domestic Product
• GDP - Depreciation 
• Net National Product
• GNP - Depreciation
• Depreciation
• Loss of value of capital equipment due to normal wear & tear.
• Gross Investment
• Net Investment + Depreciation
• GNP
• GDP + Net foreign factor payment
• Net Exports
• Exports - Imports

1/19/17: Supply & Demand Graphs

Supply & Demand Graphs

• Equilibrium: Point at which the supply curve intersects with the demand curve
• Excess Demand: Occurs when… Quantity Demanded  > Quantity Supplied
• This will result in a shortage

• Shortage: Consumers can’t get quantities of items they want
• Price Ceiling: Creates shortage
• When government puts a legal limit on how high the price of a product can be.
• Ex) Rent control

• Excess Demand: QD > QS
• Excess: Occurs when quantity supplied is greater than quantity demanded.
• Results in surplus

• Surplus: Producers have inventories they can’t get rid of.
• Price Floors:
• Created
• Lowest legal price a commodity can be sold at
• Government uses to prevent prices from becoming too low

Excess Supply: QS > QD

Online Resource: https://www.mindtools.com/pages/article/newSTR_69.htm

1/13/17: Production Costs & Revenue

Production Costs & Revenue

• Total Revenue: Total amount of money a firm receives from selling goods & services.
• Total Revenue = P x Q
• Marginal Revenue: Additional income from selling an additional unit or a good.
• Fixed Cost: Cost that doesn’t change no matter how much of a good is produced.
•  Ex) Salaries, rent/mortgage, insurance
• Variable Cost: Cost that rises or falls depending upon how much is produced.

TFC  + TVC = TC

AFC + AVC = ATC

TFC / Q = AFC

TVC / Q = AVC

TC / Q = ATC

AFC  x Q = TC

AVC  x Q = TVC

Output = Quantity

Marginal Cost = New TC – Old TC

Online Resources: http://economics.fundamentalfinance.com/micro_atc_mc.php

http://www.tutor2u.net/economics/reference/short-run-costs-of-production

1/11/17: Elasticity of Demand

Elasticity of Demand

• Elasticity of Demand: Measure of how consumers react to a change in price.
• Elastic Demand: Demand that’s very sensitive to a change in price.
• Greater than 1 (G > 1)
• Product not a necessity
• Available substitutes
• Ex) Steak, fur coat, soda

• Inelastic Demand: Demand that isn’t very sensitive to a change in price.
• Less than 1 (L < 1)
• Product is a necessity
• There are few to no substitutes
• Ex) Gas, insulin

• Unitary Elastic:
• Equal to 1 (E = 1)

• Quantity-

New Quantity – Old Quantity / Old Quantity

• Price-

New Price – Old Price / Old Price

• Price Elasticity of Demand (PED)-

% Change in Quantity / % Change in Price

Online Resources: http://www.tutor2u.net/economics/reference/price-elasticity-of-demand