1. Section 3 Lecture October 2016 Mr. Gammie
AP Macroeconomics
Section 3 Lecture
October 2016
Mr. Gammie

3. Simple model – money = green
Markets for goods and services – products we buy and consume
Factor markets – factors of production – land, labour, entrepreneurship, natural
Know how to draw this for the AP exam and test!

4. Circular Flow and Gross Domestic Product
Module 10
Circular Flow and Gross Domestic Product

5. Markets for goods and services
Government
Firms
Markets for goods and services
Financial Markets
Households
Factor Markets
Rest of the world
Government purchases of goods and services
Government borrowing
Private savings
Government transfers
Wages, profit, interest, rent
Borrowing and
stock issues
by firms
Foreign borrowing and sales of stock
Exports
Imports
GDP
Taxes
Consumer spending
Foreign lending and purchases of stock
Expanded circular flow model

6. Takeaway?
Money in = money out

7. GDP Gross Domestic product – how we measure economic performance
Aggregate output
Remember the production possibilities curve

8. September Quantity Prices Cappuccinos 25 $3.00 Café Lattes $2.50
Scones 50
$1.50
October
Quantity
Prices
Cappuccinos 30
$3.00
Café Lattes
$2.50
Scones 40
$1.50
In which month was GDP higher?
Totals:
S – Q 100, Cap $75, CL 62.50, S 75 – total $212.50
O – Q 100, Cap $90, CL$75, S 60 – total $225

9. Market Value
We must compute the value of production, not just the production level – why? It is more desirable for a company to make more money, and therefore for an economy to make more money
- If we compared the production numbers from the previous example we would end up thinking September was a “better” month

12. Final vs. Intermediate Goods
Final goods are those that are ready for consumption.
Intermediate goods are those that require further processing before they can be consumed.
Flour bought to make pizza dough by a pizza shop or by a conusmer at the grocery store

13. Avoid Double Counting
Businesses will include the value of the the intermediate good in the price of their product

14. Value Added Transaction Cost 1 lb of tomatoes from grower to Heinz
$ 0.50
Bottle of ketchup from Heinz to Safeway
$ 1.50
Safeway sells bottle to you
$ 3.00
Total $ Spent
$ 5.00
Numbers to use for value added approach, for expenditure approach

15. Within a nation – production vs. consumption
Oil produced in canada and sold to china
Within a period of a year
- Car prouced this last year and purchased this year

16. Three Approaches to Calculating GDP

17. Expenditure Approach GDP = C + I + G + (X-M)
Categories of buyers in the market – consumers, gov’t, business, other nations

18. Expenditure Approach Consumption Investment Government Purchases
Durable vs. non-durable
Investment
Final purchases of machinery, equipment and tools used for business
All construction
Inventory
Government Purchases
Spending by all levels of gov’t, wages paid to employees
Does not include transfer payments
Exports and Imports
Export (+)
Import (-)

19. (Factor) Income Approach
NI = W + R + i + Pr

20. (Factor) Income Approach
Wages
Includes salaries and benefits
Rent
Paid for use of land
Interest
Paid for use of money
Profits
Undistributed corporate profits, income earned by unincorporated businesses

21. Value Added Approach Transaction Cost
1 lb of tomatoes from grower to Heinz
$ 0.50
Bottle of ketchup from Heinz to Safeway
$ 1.50
Safeway sells bottle to you
$ 3.00
Total $ Spent
$ 5.00

23. NOT INLCUDED
Transfer payments, allowances, etc.

24. Interpreting Gross Domestic Product
Module 11
Interpreting Gross Domestic Product

25. GDP of canada this year and last year
- What was it in 1980, 2000, 2015?

26. Nominal vs. Real GDP Canada Year 1 Year 2
Quantity of apples (billions)
2,000
2,200
Price of apple
$0.25
$0.30
Quantity of oranges (billions)
1,000
1,200
Price of orange
$0.50
$0.70
GDP (billions of dollars)
Real GDP (billions of year 1 dollars)
GDP , 1,500
Real GDP 1,000 1,150
Q* year 1 prices to get real GDP
P*Q

27. Nominal vs. Real GDP
Real GDP is the total value of the final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.
Nominal GDP is the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.

28. Inflation

29. USA GDP Nominal GDP (billions of current dollars)
Year
Nominal GDP (billions of current dollars)
Real GDP (billions of 2005 dollars)
2000
$9,951.5
$11,286
2005
12,683
12,638
2013
16,803
14,504
Calculate differences
N 27.44%, 32.48%
R 11.97, 14.76

30. Another Example…

31. GDP of Canada and US this year
GDP per Capita

32. GDP Per Capita
Accounts for population

33. GDP doesn’t…