No Bull Economics Lessons

In economics courses, investment generally refers to business expenditures on capital goods. There are three components to gross investment when calculating the gross domestic product:

1. Fixed investment on capital goods (tools, machinery)

2. Residential and nonresidential investment (houses, apartments, stores)

3. Adjustments to inventories (accounting for unsold goods produced in the current year)

Net Investment = Gross Investment - Depreciation (AKA Consumption of Fixed Capital)

AP Macroeconomics Unit 2 Measuring Economic Performance

To calculate the real or nominal interest rate, we can use the Fisher equation. The real interest rate accounts for changes in the price level and is very important for businesses interested in investment spending. When real interest rates are low, businesses will increase spending. When real interest rates are high, businesses are less likely to invest.

Real Interest Rate = Nominal Interest Rate - Inflation Rate

(or)

Nominal Interest Rate = Real Interest Rate + Inflation Rate

AP Macroeconomics Unit 2 Measuring Economic Performance

The inflation rate measures the percentage increase in consumer prices over a period of time. To calculate the inflation rate, we use a consumer price index (CPI). The consumer price index tracks the prices of goods and services that the typical household buys using a market basket sample (CPI = Market Basket of Specific Year / Market Basket of a Base Year).

The No Bull Review diagram below shows the formula for calculating the inflation rate when you have the CPIs.

AP Macroeconomics Unit 2 Measuring Economic Performance

Real GDP per capita is one way to measure economic growth and a nation's general economic well-being. It represents the output per person within an economy.

Real GDP per capita = Real GDP / Population

AP Macroeconomics Unit 2 Measuring Economic Performance

Real GDP is output that has been adjusted to hold the price level constant. This way we can measure the level of goods and services that are produced over a period of time without worrying about changes in the price level.

Nominal GDP has not been adjusted for changes in the price level and reflects the market value of all goods and services in the year everything was produced.

Therefore, real GDP is more important than nominal GDP for measuring economic growth.

How to calculate the Real GDP:

Real GDP = Nominal GDP / GDP Price Index

This No Bull Review video shows reviews real GDP and nominal GDP.

AP Macroeconomics Unit 2 Measuring Economic Performance

Demand-pull inflation is caused by an increase in aggregate demand. This means that buyers are pulling up the general price level of goods and services within an economy.

Cost-push inflation is caused by a decrease in short-run aggregate supply. This means that an increase in production costs (resource prices) have caused an increase in the general price level.

AP Macroeconomics Unit 2 Measuring Economic Performance

The business cycle shows the upturns and downturns of economic activity. It contains four parts:

1. Expansions (real GDP increases, unemployment falls)

2. Peaks (real GDP is at its max, resources are fully employed)

3. Contractions (real GDP declines, unemployment rises)

4. Troughs (real GDP is at its lowest point, unemployment is near its highest point)

The No Bull Review diagram below illustrates the four key parts along with an upward sloping line which demonstrates the long term trend of economic growth.

AP Macroeconomics Unit 2 Measuring Economic Performance

There are three types of unemployment that make up the rate of unemployment in a given economy.

1. Frictional unemployment (temporary, seasonal): includes recent graduates and people who quit their job to find something better.

2. Structural unemployment (skills no longer needed): includes people who are replaced by technology or new industries (creative destruction). These people need to retrain or move to find work.

3. Cyclical unemployment (due to recession): includes people who are laid off because the economy is weak (downturn in the business cycle).

This No Bull Review video discusses the three types of unemployment and the natural rate of unemployment.

AP Macroeconomics Unit 2 Measuring Economic Performance

A nation's gross domestic product reflects the production of goods and services produced legally within a country's borders in one year. The following items are NOT included in the calculation of a country's GDP:

1. Financial transactions (stocks,bonds)

2. Transfer payments

3. Used goods

4. Goods produced overseas

5. Non-market transactions

6. Illegal transactions

7. Unreported transactions

8. Intermediate goods

This No Bull Review video explains the list above in more detail

AP Macroeconomics Unit 2 Economic Performance

The four components to a nation's gross domestic product are consumption, gross investment, government spending, and net exports. The GDP accounts for production within a country's borders in one year.

The No Bull Review video below shows you what types of goods are included and excluded from a country's gross domestic product

AP Macroeconomics Unit 2 Measuring Economic Performance

The circular flow model is a system of incentives that shows how businesses and households interact through product markets and resource markets.

This No Bull Review video shows you how to draw the circular flow model correctly

AP Macroeconomics Unit 2 Measuring Economic Performance

The unemployment rate measures the percentage of people in the labor force that are actively looking for employment.

To calculate the rate of unemoployment, take the number of people that are unemployed and looking for work and divide by the number of people that are working plus the number of people looking for work.

Unemployment Rate = Quantity of people unemployed / Quantity of people in the labor force

Watch the No Bull Review video below for more information:

AP Macroeconomics Unit 2 Measuring Economic Performance

AP Economics Students: Here is an interesting piece from The Economist that discusses Brazil's rocketing economy compared to the other world economic powers of tomorrow (The B.R.I.C. Countries are Brazil, Russia, India, China).

http://www.economist.com/opinion/displayStory.cfm?story_id=14845197&source=hptextfeature

AP Macroeconomics Unit 6 International Trade

AP Economics Students: Here is that interactive unemployment graph from the NY Times that I mentioned in class. Unfortunately, the computer in the classroom could not load it so we were unable to discuss in detail. http://www.nytimes.com/interactive/2009/11/06/business/economy/unemployment-lines.html