I. The Circular Flow Model http://www.stlouisfed.org/education_resources/economic-lowdown-video-companion-series/episode-6-circular-flow/

Circular Flow Diagram Resource Market and Factor Market Households own factors of production – sell them to Firms Firms buy factors of production – pay wages, rent etc. Product Market Firms sell goods and services to households Households pay for goods and services

Government Resources Market – buys factors of production from households Product Market – buys goods and services from firms Takes in money through taxes and provides goods and services to both households and firms

Land, Labor, Capital and Entrepreneurial Ability Resources Factor Market AKA Resource Market Households sell Firms buy Resources Money income, wages, rents, interests, profits Costs expenditures resources Goods and services Goods and services firms buy factors of production sell products Households Sell factors of production Buy products taxes taxes Government expenditures Money, consumption expenditure Goods and services Revenue Product Market Households buy Firms sell Goods and services Goods and services

https://www.youtube.com/watch?v=BJZ_H4NG1nw /

GDP Total market value of all final goods and services produced in a country in a year Measured in “quarters” of years

Steel – intermediate good New car – final good GDP Total market value of all final goods and services produced in a year Measured in “quarters” of years C. To avoid multiple counting only FINAL goods are counted Intermediate goods – goods and services purchased for resale or more processing Final goods – goods and services purchased for final use by the consumer Steel – intermediate good New car – final good

D. What doesn’t count Second hand goods

D. What doesn’t count Second hand goods Gifts or transfers (social security welfare etc.)

D. What doesn’t count Second hand goods Gifts or transfers (social security welfare etc.) Stock market transactions

D. What doesn’t count Second hand goods Gifts or transfers (social security welfare etc.) Stock market transactions Unreported business activities

Gifts or transfers (social security welfare etc.) D. What doesn’t count Second hand goods Gifts or transfers (social security welfare etc.) Stock market transactions Unreported business activities Illegal activities http://www.euronews.com/2014/05/30/illegal-sex-and-drugs-trade-to-be-included-in-calculating-british-gdp

D. What doesn’t count Second hand goods Gifts or transfers (social security welfare etc.) Stock market transactions Unreported business activities Illegal activities Financial transactions between banks and businesses

D. What doesn’t count Second hand goods Gifts or transfers (social security welfare etc.) Stock market transactions Unreported business activities Illegal activities Financial transactions between banks and businesses Non market activities like volunteer work

Does it Count?

C = Personal Consumption 67% of the economy Formula E. The expenditures approach - C + Ig + G + Xn = GDP C = Personal Consumption 67% of the economy Purchases of finished goods and services NOT houses or other construction Ig = Gross Private Business Investment a. Factory equipment maintenance New factory equipment New Construction (houses or factory) Unsold inventory of products build in a year, but not sold in that year G = Government Spending Xn = Net foreign factor of Trade: Exports minus Imports Exports = dollars in Imports = dollars out Since WWII, Xn has usually been a negative number C + Ig + G + Xn = GDP https://www.youtube.com/watch?v=SYFYla1H7KE

What Counts in GDP? Is it C, Ig, G, or Xn?

Nominal GDP vs. Real GDP Nominal GDP Total output of final goods and services produced by an economy in 1 year b. no adjustment for inflation Price index Used to measure price changes in an economy To construct select a year to serve as the base year Prices of other years are expressed as a percentage of the base year The value of the price index in the base year is always 100 Real GDP Adjusted for price changes over time Calculated using a price index GDP Deflator Price index used to “deflate” nominal GDP to reflect real growth

Formulas price of a market basket of goods Price index = Nominal GDP = Units of output X price https://www.youtube.com/watch?v=iV4DS9aAQqM price of a market basket of goods Price of same market basket in base year Price index = X 100 ____nominal GDP________ price index (in hundredths) Real GDP =

Price Index for year one ALWAYS = 100 Price of a market basket of goods Price of same market basket in base year Price index = X 100 Price Index for year one ALWAYS = 100 Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 3 8 25 4 10 30 11 28

Price index for Year 2 20 10 = X 100 = 200 price of a market basket of goods Price of same market basket in base year Price index = X 100 Price index for Year 2 20 10 = X 100 = 200 Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 200 3 8 25 4 10 30 11 28

price of a market basket of goods Price of same market basket in base year Price index = X 100 Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 200 3 8 25 250 4 10 30 300 11 28 280

Nominal GDP = Units of output x price Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 200 3 8 25 250 4 10 30 300 11 28 280

Nominal GDP = Units of output x price Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 200 140 3 8 25 250 4 10 30 300 11 28 280 308

______nominal GDP________ price index (in hundredths) Real GDP = Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 200 140 3 8 25 250 4 10 30 300 11 28 280 308

______nominal GDP________ price index (in hundredths) Real GDP = 140 2 70 = Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 200 140 70 3 8 25 250 4 10 30 300 11 28 280 308

_________nominal GDP________ price index (in hundredths) Real GDP = Year (1) Units of Output (2) Price of Pizza per unit Price index year 1 = 100 Nominal GDP (1) X (2) Real GDP 1 5 $10 100 50 2 7 $20 200 140 70 3 8 25 250 80 4 10 30 300 11 28 280 308 110

One More Formula Nominal GDP GDP deflator = X 100 Real GDP https://www.youtube.com/watch?v=gqm--7s0Ks4 Nominal GDP Real GDP GDP deflator = X 100 G. Per Capita Output – divide real GDP by the population

Business Cycle – alternating rises and declines in economic activity A. Peak – business activity has reached a temporary maximum B. Recession – decline in total output, income, employment, and trade C. Trough – output and employment are at their lowest levels D. Recovery – output and employment rise toward full employment

1. Stagflation – when inflation and unemployment rise simultaneously E. Other business cycle measures 1. Stagflation – when inflation and unemployment rise simultaneously 2. Misery Index – a measurement that combines unemployment and inflation

Inflation – rise in general price level Measuring inflation CPI – consumer Price Index One measure of inflation Measures the cost of a consistent market basket of goods When using Price indexes – the Index year is always 100

Remember?! Inflation – rise in general price level Measuring inflation CPI – consumer Price Index One measure of inflation Measures the cost of a consistent market basket of goods When using Price indexes – the Index year is always 100 Remember?! Price of a market basket _____in a specific year____ Price of same market basket in base year Price index = X 100

Inflation – rise in general price level Measuring inflation CPI – consumer Price Index One measure of inflation Measures the cost of a consistent market basket of goods When using Price indexes – the Index year is always 100 Inflation formulas Year later CPI - year earlier CPI Year earlier CPI Rate of inflation = X 100 Rule of 70 – number of years it will take for a measure to double ____70______ rate of inflation Number of years it will take for the price level to double =

Year later CPI - year earlier CPI Rate of inflation = X 100 Calculate the rate of inflation for years 2-4 Year__________________________Price_Index________________Rate of Inflation 1 100 2 112.00 __________ 3 123.20 __________ 4 129.36 __________ 12% 10% 5%

Rule of 70 – number of years it will take for a measure to double _____70_____ rate of inflation Number of years it will take for the price level to double = How many years will it take for the price level to double if the inflation rate is 2% per year? 70 2 = 35 years Suppose it will only take 5 years for the money you have invested to double. What is the annual interest rate? 70 i = 5 years i = 14%

Demand pull inflation Spending beyond a country’s ability to produce Excess demand bids up prices Too much money chasing too few goods

Demand pull inflation Spending beyond a country’s ability to produce Excess demand bids up prices Too much money chasing too few goods Cost push inflation Increase in the cost of inputs Raises per unit production costs

D. Who is hurt Fixed Income receivers – they see their REAL income fall Savers Creditors – money paid back to them has less value

E. Who is not affected Flexible income receivers Many get pay raises COLAs – cost of living adjustments Debtors – they are paying back dollars worth less than the ones they borrowed

F. Disinflation – lowering of the inflation rate G. Deflation – lowering of price level H. Hyperinflation – extremely rapid inflation

Hyperinflation in Zimbabwe https://www.youtube.com/watch?v=Jt15F21jpN8

They are dealing with inflation. Meet Sarah, Bob and Milt. They are dealing with inflation.

IV. Unemployment A. Unemployment rate = x 100 Unemployed Labor force

IV. Unemployment A. Unemployment rate = x 100 B. Who isn’t in the labor force 1. under 16 Unemployed Labor force

IV. Unemployment A. Unemployment rate = x 100 B. Who isn’t in the labor force 1. under 16 2. in the military Unemployed Labor force

IV. Unemployment A. Unemployment rate = x 100 B. Who isn’t in the labor force 1. under 16 2. in the military 3. institutionalized Unemployed Labor force

IV. Unemployment A. Unemployment rate = x 100 B. Who isn’t in the labor force 1. under 16 2. in the military 3. institutionalized 4. retired Unemployed Labor force

IV. Unemployment A. Unemployment rate = x 100 B. Who isn’t in the labor force 1. under 16 2. in the military 3. institutionalized 4. retired 5. homemakers Unemployed Labor force

IV. Unemployment A. Unemployment rate = x 100 B. Who isn’t in the labor force 1. under 16 2. in the military 3. institutionalized 4. retired 5. homemakers 6. students Unemployed Labor force

B. Who isn’t in the labor force 1. under 16 2. in the military 3. institutionalized 4. retired 5. homemakers 6. students 7. discouraged workers

C. Who does count as part of the labor force 1. full time workers

2. part time workers (even if they would rather be working full time C. Who does count as part of the labor force 1. full time workers 2. part time workers (even if they would rather be working full time

2. part time workers (even if they would rather be working full time C. Who does count as part of the labor force 1. full time workers 2. part time workers (even if they would rather be working full time 3. unpaid family workers

2. part time workers (even if they would rather be working full time C. Who does count as part of the labor force 1. full time workers 2. part time workers (even if they would rather be working full time 3. unpaid family workers 4. those on sick leave, vacation, or strike

2. part time workers (even if they would rather be working full time) C. Who does count as part of the labor force 1. full time workers 2. part time workers (even if they would rather be working full time) 3. unpaid family workers 4. those on sick leave, vacation, or strike 5. looking for work

1. 0% - 3% - overextended economy 2. 4 – 5% - full employment D. What does the rate mean 1. 0% - 3% - overextended economy 2. 4 – 5% - full employment 3. 6% + - weak or recession economy 4. 25% - highest unemployment 1933

Frictional unemployment – those between jobs

Frictional unemployment – those between jobs Structural unemployment Caused by changes in consumer demand Change in technology Geographical changes

Frictional unemployment – those between jobs Structural unemployment Caused by changes in consumer demand Change in technology Geographical changes Cyclical unemployment – in the recession stage of the business cycle https://www.youtube.com/watch?v=3GTgniuxA50

What Type of Unemployment is it? Frictional Cyclical Structural Not unemployed