Shifters In AD

2 thing that can cause AD to shift:
 - A change in C, Ig, G, or Xn
 - A multiplier effect that produces a greater change than the original change in the 4 components.

1. Consumption
Household spending is affected by
- Consumer Wealth
- Consumer Expenditur
- Household Indepth
- Taxes

2. The Real GDP rate
Expected returns are influenced by:
- Expectation of future profitability
- Technology
- Degree of access capacity ( existing stock capital)
- Business Taxes

3. Government Spending
- More government spending = Increase in AD
- Less government spending = Decrease in AD

4. Net Export
Net exports are sensitive to:
- Exchange Rates (International Value of $)
- Relative Income

Aggregate Demand Curve

Aggregate Demand (AD): the demand by consumers, business, government, and foreign countries.
- Changes in price level cause a move along the curve.

1. Real Balance Effect:
- Higher price levels reduce the purchasing power of money
- Decreases the quantity or expenditure
- Lower prices increase purchasing power of money.

2. Interest Rate Effect:
- When price level increase, lenders need to charge higher interest rates to get a real return on their    loans.
- Higher interest rates discourage consumer spending and business investment.


3. Foreign Trade Effect:
- When US price levels rise, foreign buyers purchase fewer US goods and Americans buy more foreign goods.
- Exports fall and import rise causing GDP it decrease.

Types of Unemployment

There are four types of unemployment; Frictional, Structural, Seasonal, and Cyclical.

- Frictional Unemployment consist of those who are looking for a job. This could be either temporary unemployment or in between jobs. These people have transferable skills. Examples would be college graduates or someone that just quit their job.

- Structural Unemployment is caused by changes in the structure of the labor force that make certain skills useless. These worker do not have transferable skills. They must learn a new skill in order to get a job.

- Seasonal Unemployment is due to the time and nature of the job. Examples would be school bus drivers, life guards, and Santa impersonators.

- Cyclical Unemployment results from economic downturns such as a recession. As demand for goods and services falls, labor falls and workers are laid off.

Unemployment

Unemployment is the failure to use available resources particularly labor to produce desired goods and services. There are certain people in the labor force (employed+ unemployed). This includes:

-Anyone above the age of 16
- Willing and able to work

People not in the labor force include:

-Military
- Retired
- Student
- Disabled
- Homeworkers
- People in mental institutions
- People in Jail
- People not looking for a job



The acceptable unemployment rate in the US is 4-5 percent. This is also known as Full Employment or Natural Rate of Unemployment (NRU)

Formula for calculating Unemployment Rate: # of unemployed/ # of employed + # of unemployed . 100

Types of GDP

There are two types of GDP; Nominal GDP and Real GDP.

Nominal GDP is the value of output products in a current year price. It can increase from year to year if either the price  or the quantity increases. If there is an increase in prices also known as Inflation, we used this.

Real GDP is the value of output produced in constant base year prices. It can be adjusted for inflation. It can also be used to measure economic growth. Real GDP can increase from year to year if the output increases.

The formula for both is Price times Quantity. However they apply in different ways.

Nominal GDP is the price of the current year times the quantity of the current year

Real GDP is the price of the given bases year times the quantity of the current year. If the bases year isn't given, you can use the earliest year shown.

How to Calculate GDP

There are 2 methods in calculating GDP. One is called Expenditure Approach while the other is called Income Approach. However, Expenditure Approach is the method that is mostly used.

Expenditure Approach is when you add up all spending of final goods and services produced in a given year.

 The Formula is: C+IG+G+XN (refer to previous post for definition)

Income Approach is a lot more work. It adds up all the income that results from selling final good and services produced in a given year.

The formula is: Wages+ Rent+ Interest+ Profit+ Structural Adjustment (includes Indirect business taxes, Depreciation, and Net Foreign Factor Payment).

Unit 2: GDP

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a nation in a given year.


There are certain thing that are not included in GDP things such as:

-Intermediate Good (a product that needs further work)

- Used/Second hand good

- Purely financial transactions (Stock exchange)

- Illegal activities

- Unreported business activities such as tips

- Non market activities

- Transferred payments (scholarships, welfare, etc.)

- GNP (will discuss later on)

There types of transactions that are included in the calculation of GDP  include:

- Personal Consumption Expenditure or money spent on personal matters. This is represented by a C

- Gross Private Domestic Investment represented by an IG This includes money spent on:
       -Factory maintenance equipment
       - New factory equipment
       - Construction of housing
       - Unsold inventory of products made in a year. An example is a house that has been built with              movers living in it yet

- Government spending represented by G

- Net Export which in exports-imports. This is represented by XN