Aggregate supply

Aggregate supply
-the level of real GDP that firms will produce at each price level

Long Run vs. Short Run
Long Run: period of time where input prices are completely flexible and adjust to the 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
•  LRAS- vertical at full employment

Change in short run aggregated supply

• increase in SRAS (shift to the right -->)
• decrease in SRAS ( shifts to the left <--)
•  the key to understanding shifts in the SRAS is per unit cost of production : total input cost /total output

Determinates of SRAS

1. input prices

• increase in resources : Shift to the left (<--)
• decreases in resources: shift to the right (-->)

Domestic resource prices

-wages( 75% of all business)

-cost of capital

-raw materials ( commodity prices)

 

Foreign resource prices

-strong $= lower foreign resource prices

-weak$=  higher foreign resource prices

 

Market power- monopolies and cartels that control resource control the price of theses resource.

•  increase in resource prices : SRAS (<--)
• decrease in resource prices: SRAS (-->) 

2. Productivity

-total output/total input

• more productivity= lower unit production (SRAS -->)
• less productivity=higher unit production cost ( SRAS<--)

3.legal-institutional environment

  -Taxes and subsides

• taxes- money to government on businesses increase per unit production cost = SRAS (<--)
• subsides ( money from the government) reduces per unit cost of production=SRAS (-->)

     - Government regulations

• creates a cost of compliance = SRAS (<--)
• deregulation reduces compliance cost= SRAS (-->)

 

 

 

unit 3 aggregated demand

Aggregated demand
-show the amount of real GDP that the private, public, foreign sectors collectively desire
-inverse relationship between price level and real GDP


Left is decrease
Right is increase

3 reason AD is downward sloping
       1.real balance effect

•   when the price level is high households/business cant afford to purchase as much output
• when the price level is low households/business can afford to purchase more output.

       2.interest rate effect

•  the a higher price level increases the interest rate which tends to discourage investment
•  lower price level decreases the interest rate which tends to encourage investment

       3.foreign purchase effect

• a higher price level increases the demand for relatively cheaper imports
• a lower price level increases the demand for relatively cheaper us exports

Shifts in aggregated demand
2 components
-A change in C, Ig , G and Xn
-Multiplier effect that produces a greater change than the original change in the 4 components

• Increase in AD= shifts to the right
• Decrease in AD=shifts to the left

Determinants of AD
    1. Consumption (C)-household spending affected by
                     -consumer wealth

• More wealth: More spending ( shift to the right. -->)
• less wealth: less spending ( shift to the left <--)

                -consumer expectation

• positive expectation: more spending ( shift to the right -->)
• negative expectation: less spending  ( shift to the left <--)

               - Household indebtedness

• less debt: more spending ( shift to the right -->)
• more debt: less spending ( shift to the left <--)

          - Taxes

• less taxes : More spending ( shift to the right -->)
• More taxes : less spending (shift to to the left <--)

    2. Investment spending
        -real interest rate

• Lower real interest rate : more investment ( shift tot the right -->)
• Higher real interest rate : less investment ( shift to the left <--)

       - Expected returns

• Higher expected returns : more investment ( shift to the right -->)
• lower expected returns : less investment ( shift to the left <--)
• Expected returns are influenced by: - expectation of future probability, -technology, degree of excess capacity ( existing stock of capital),- business taxes

3. Government spending

• More government spending :( shift to the right -->)
• less government spending: ( shift to the left <--)

4.Net exports

          - exchange rate( international value of money)

• strong money : more imports and fewer exports ( shift to the left <--)
• weak money: fewer imports and more exports ( shift to the right -->)

           - relative income

• strong foreign economy: more exports ( shift tot he right -->)
• weak foreign economy : less exports ( shift to the left <--)

Unemployment

Unemployment- % of people who do not have jobs but are in the labor force

• Labor force- the number of people  employed + # of people unemployed

People who are excluded from the labor force

• Kids
• military personal
• Mentally insane
• locked up
• stay at home parents
• full time student
• retired people
• Discouraged workers

employed vs unemployed

• Employed : people 16 and older who have a job
• Unemployed : people 16 or older and have actually looked for a job for two weeks
• Unemployment rate: # of unemployed/labor force x 100

Types of unemployment
1.seasonal- mall Santa, life guard
2.Frictional-between jobs,leaving one job for someting bigger and better
3.strucural unemployment-lack of skill or declining industrys
4.cyclical -bad for soceity and individuals ( reccesion)

 Full employment-occurs when  there is no cyclical unemployment
okuns law- every one percent in unemployment over the NRU there is a 2 percent decline in real gdp
Rule of 70- 70 / rate of change

Introduction to inflation

consumer price index
 Measures the market basket of goods for a typical american family
Formula: cost of market basket in a year/cost of market basket in a base year
 x 100.

• Real GDP is adjusted for inflation
• Inflation -general rise of a price level
• Deflation general fall of the price level

Rate of inflation
CPI2-CPI1/CPI1 x 100
 New minus old over old

Types of inflations

• cost push inflation- higher production of cost which increase prices
• demand pull inflation-too many dollars chasing too few goods
• political panics- recession or depression

Inflation help

• Debtors

Inflation hurt

• lenders
• savers
• people with fixed wages

Nominal vs Real GDP

Nominal GDP- value of output produced in current prices
(can increase year to year )

• Formula : P x Q. Of the current year.
• used to find inflation

Real GDP- value of output produced in base year price

• real GDP can increase only if output increase.
• Formual : P x Q. Price of the base year times the quantity of the current year.

Ex: Determine nominal GDP

 Year 1 (Base year) 10 computers sold at $2000 ach and 15 tv sold at $500 dollars each. Year 4 17 computer sold @ $2,200 each and 20 tv sold @$550 each.

                        Computers                         Tv

year 1           10@$2000                     15@ $500

                      total: $20,000                  Total 7,500

Year 2         17@ 2,200                      20@ 550

                         =$37,400                   = $11,000

Answers : Real GDP for year 4 =$4400

Nominal for year 4= $48,400

 

Nominal vs real Gdp video

GDP Deflator

• Base year GDP is always 100
• Years before the base year its less than 100
• years after the base years the deflator is more than 100

GDP

GDP formulas

GNP- (Gross national product)- Total value of all final  goods and services produced by Americans in a given year.

Expenditure approach ( Goods and services)

• GDP= C+IG+G+XN
• C- personal consumption ( final goods and services)
• Ig- Gross private domestic investment (inventory)
• G- government spending
• Xn- ( net exports- net imports)

Income approach (factors of productions)

• GDP=W+R+I+P+Statistical adjustments
•  W- wages (salaries/compensations)
• R-Rents (rental income)
• I-interest (interest income)
• P-Proprietors income
• Statistical adjustments- To match expenditure approach

Budget deficit-total amount that the government borrows with in a year

• Transfer payments+govt purchase of goods and services- government tax and fee collection
• Deficit +         surplus-

Trade
Exports-imports

• Deficit -     surplus +

National income
NI=compensation of employees+proprietors income+rental income+interest income+corporation profit

Or

                          NI= GDP-indirect business tax-depreciation-net foreign factor

Disposable income

DPI=NI-household taxes (personal taxes)+Government transfer payment

Net domestic product

NDP=GDP-Depreciation

Net national product

NNP=GNP-Depreciation

Gross National Product

GDP-Net foreign factor payment