1. Circular flow – the movement of output and income from one sector of the economy to another
Aggregate demand is the total demand in the economy AD = C + I + G + net exports What factors affect each component of aggregate demand?
GDP –Gross Domestic Product – the market value of all final goods and services produced in a country in a calendar year Add up total spending to come up with total GDP Market value of production in the economy, not the availability of goods and services GDP is NOT an indication of consumer well being If C, I or G increase, aggregate expenditures increase, therefore GDP increases Historically, GDP is @ 3%
Consumption – spending by households on goods and services 1. Disposable Income 2. Past consumption 3. Expectation of : a) future income b) future prices of durable goods 4. Community attitudes towards thrift 5. Cost and availability of credit 6. Rate of introduction of new products 7. Average age of stock and durable goods owned by households
Investment – the purchase of capital goods (including machinery, technology and new buildings) that are used to produce goods and services. 1. Interest rates 2. Expected sales 3. Excess capacity 4. Average age of existing capital 5. Degree of competition 6. Shifts in consumer demand 7. Degree of uncertainty 8. Expected money wage rate increases
Government 1. Social needs 2. Politics 3. Foreign affairs ( doesn’t usually cause prosperity but they can cause full production) 4. Attitudes toward the role of government 5. Demand for fiscal policy (changes in the expenditure or tax revenues of the federal government, undertaken to promote full employment, price stability and reasonable rates of economic growth)
Net Exports Exports – Imports (goods we send to other countries minus goods from other countries we buy in the United States)
Aggregate supply is the total supply in the economy What factors affect aggregate supply?
1. Land - “gifts of nature” that can be used to produce goods and services; for example, oceans, air, mineral deposits, virgin forests and actual fields of land
2. Labor – the quantity and quality of human effort available to produce goods and services A) changes in population B) Inclusion of more people in the labor force c) Labor productivity (education)
Capital – resources and goods made and used to produce other goods and service. Examples include buildings, machinery, tools and equipment A) new investment in real capital B) investment in human capital