Unit-2 Macro Cram GDP, Unemployment, Inflation. Circular Flow of a closed Economy Spending Goods and services bought Goods and services bought Revenue.

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Presentation transcript:

Unit-2 Macro Cram GDP, Unemployment, Inflation

Circular Flow of a closed Economy Spending Goods and services bought Goods and services bought Revenue Goods and services sold Goods and services sold Labor, land, capital & entrepreneurship Labor, land, capital & entrepreneurship Income = Flow of inputs and outputs = Flow of dollars Factors of production Factors of production Wages, rent, and profit Wages, rent, and profit FIRMS HOUSEHOLDS FACTOR Market FACTOR MARKET PRODUCT MARKET PRODUCT MARKET Circular Flow Speeds Up GDP ↑

Business Cycle ? ’s Technology Boom Housing Bubble Great Recession Dot.com Collapse PEAK TROUGH

GDP = C + I + G + (X-M) Measuring Economic Growth: Calculating GDP: What Counts? Only NEW & FINAL goods Domestic Products (made in USA) What does NOT Count? Used goods International products Financial transactions Non-market transactions Gov’t Transfer Payments (i.e. welfare, social security, unemployment) GDP does not measure: mix of goods, quality of products, quality of life, leisure time Business Investment, Consumer/Business Construction, & Change in Inventories. (new houses count as investment!)

GDP = C + I + G + NX GDP = Aggregate Demand (AD) GDP is calculated by adding up all spending or adding up all income) All Spending = All Income: Y = C + I + G + (X-M) 2 Ways to measure GDP or Labor  Wages Land  Rent Capital  Interest Entrep.  Profit Talent

4-Types of Unemployment Structural –Skills do not match demand for labor Cyclical –too low a level of GDP (recession) Frictional –Temporarily between Jobs Seasonal –Based on time of year Natural Rate of Employment (also called full employment) About 4.5% in USA Allows for some Frictional & Structural Natural Rate is where: Cyclical unemployment is zero Seasonal “factored out”

Measuring Inflation GDP deflator – uses price of all goods/services included in GDP –Very Broad index but only has domestically produced goods CPI index – uses prices of a consumer market basket of goods & services –Very narrow index but has international goods Substitution Bias New goods Quality changes What should be in basket? Inflation Index: Base year always 100 Use to calculate inflation rates COLA = cost of living adjustment

Practice Test #2 Questions #1 - #20

Multiple Choice Answers 8B 9A 10C 11B 12D 13C 14A 15B 16D 17A 18A 19A 20A