How the U.S. Economy works Economics Circular Flow & GDP How the U.S. Economy works

What is an Economy? The way goods, services & money flow through an economic system The Circular Flow describes how goods, services & money flow through a market economy

2 Sides of a Market Economy Consumers decide what to BUY! Demand side of economy Producers decide what to SELL (MAKE) Supply side of economy

4 Factors of Production Resources used to make goods & services 1) Land- all basic natural resources 2) Labor- human work/labor 3) Physical Capital- previously produced goods 4) Human Capital education, skills, etc… To open a coffee shop: Labor = worker Physical Capital = Coffee Machine Land = Beans & Rent store Human Capital = Skills of workers & owner of store

Product & Factor Markets Product Market: where any good or service is sold Factor Market: where factors of production are exchanged Consumers use product market Producers use factor market

CIRCULAR FLOW of a Market Economy Money-$ Money-$ Product Market Demand Supply Circular Flow CONSUMERS PRODUCERS Supply Demand Money-$ Money-$ Factors of Production (Land, Labor & Physical Capital Human Capital)

Circular Flow Worksheet

Circular Flow Price of Oil $95 => $150 Affect on Circular Flow? Jobs are created as Circular Flow ↑ Price of Oil $95 => $150 Affect on Circular Flow? PRODUCERS

Gross Domestic Product Measuring Economic Growth

Measuring the Circular Flow The total dollar value of economic output of the circular flow is called Gross Domestic Product (GDP) The U.S. attempts to maximize GDP Higher GDP growth leads to job creation Jobs are created As GDP ↑ Circular Flow PRODUCERS CONSUMERS Factors of Production Products Land, Labor & Capital

GDP growth: what is too high? The economy has an upper and lower “speed limit” of growth Too fast: If GDP grows above 5.0% per year, the economy may experience inflation Prices rise Too slow: If GDP grows below 2%, not enough jobs are created Unemployment rate increases

GDP growth too slow to create enough jobs! 2014 = + 2.4% 2015 = + 2.1% 2013 = + 1.5% 2012 = + 2.2%

How GDP is calculated GDP = C + I + G + (X-M)

What goods count in GDP? Dollar Value of all FINAL new goods & services produced in USA over one year Imports do not count Used goods do not count Must avoid “double counting” in GDP Example: Steel used in automobiles Count value of the entire car (final good)—not the parts

Circular Flow & GDP Review GDP = C + I + G + (X-M)

Slow GDP Growth U.S. Economy in 2015 Factors Causing Slow Growth? Recessions in Europe Slow Growth in China Collapsing Oil Prices => USA layoffs Underemployment of Human Capital Declining Labor Force Participation GDP = C + I + G + (X-M)

GDP Worksheet Circular Flow

GDP does NOT Measure: Leisure time Hours Worked: What you produce Vacation Days: Europe get many more than U.S. workers Hours Worked: Work 80 hours vs. 40 hrs per week => GDP goes up What you produce Guns vs. butter: all products count the same!

U.S. GDP in Comparison U.S. 15.6 Trillion Entire World: 65.0 Trillion 24% of World GDP U.S. 15.6 Trillion Entire World: 65.0 Trillion China 5.8 Trillion Japan 5.6 Trillion Germany 3.3 Trillion