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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
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Circular Flow Write the following in the circular flow diagram:
Households Entrepreneurship Firms Product Market Factor Market Land, labor, and Capital Money – wages etc. Goods and services Money – revenue etc. labor capital Land, Entrepreneurship Factor market wages money Money revenue Firms Households Product Market services Goods
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Households Firms Sort GREEN cards by deciding if the action described would be taken by households or firms.
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buy the factors of production Buyers in the resource market
Households Firms buy the factors of production Buyers in the resource market Sell goods and services Sellers in the product market Pay wages for factors of production Owners of the factors of production Buyers in the product market Pay revenue in exchange for goods and services Sellers in the resource market Receive wages in the resource market
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Product Market Resource Market Sort YELLOW cards by deciding if the action described would happen in the product or resource market.
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Households buy consumer goods Firms receive money or revenue
Product Market Resource Market households are buyers Firms are sellers Households buy consumer goods Firms receive money or revenue Firms are buyers Households supply land, labor, capital and entrepreneurship Households are sellers Households receive money
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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
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Formula The expenditures approach - C + Ig + G + Xn = GDP C = Personal Consumption a. 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
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Fill in the Formula on your handout!
GDP = C + Ig + G + Xn Government Spending Net Exports X - M Consumption Investment Fill in the Formula on your handout!
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Determine where in the GDP formula each item on the WHITE cards fits.
GDP = C + Ig + G + Xn Doesn’t Count in GDP Government Spending Net Exports X - M Consumption Investment Determine where in the GDP formula each item on the WHITE cards fits. Net exports Consumption Investment Government Spending
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GDP = C + Ig + G + Xn Doesn’t Count in GDP Government Spending
Consumer savings Transfer payments Stocks and bonds Used goods Clean air Intermediate good Government Spending Net Exports X - M Consumption Investment Net exports Consumption Government Spending Investment Consumer spending College textbook Home computer Ford F150 truck made in San Antonio but sold in Germany Exports – imports Marlboro cigarettes made in South Carolina and sold to French Smokers Mercedes made in Germany but sold in San Antonio (-M) New House Machine in a factory Capital goods Additions to business inventory New shopping mall built downtown Military spending An FBI agent’s paycheck
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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 Requires a price index GDP Deflator Price index used to “deflate” nominal GDP to reflect real growth
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Real GDP VS Nominal GDP Determine if the BLUE card is a characteristic of Nominal or Real GDP and sort them accordingly.
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Adjusted for inflation Calculated by using a price index
Real GDP VS Nominal GDP Adjusted for inflation Calculated by using a price index Shows how prices have changed over time Measures changes in production not price increases May or may not increase when prices go up Shows the value of current products at current prices Increases when price goes up Calculated by adding the value of all items produced in an economy for a particular year
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Use the information below to calculate Nominal GDP in Narvaizland
Billions of dollars Exports $367 Dividends Consumption of fixed capital Corporate profits Personal consumption Compensation of employees 1722 Government purchases Rents Taxes on production and imports 255 Gross private domestic investment 437 Imports
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Narvaizland GDP Consumer Spending 1810 Gross Investment 437
Government Spending 577 Net Exports GDP To find Net exports Exports – Imports = 29
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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 7. discouraged Workers Unemployed Labor force
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Sort the RED cards based on what the action would do to the rate of unemployment.
Increase in unemployment rate Decrease in unemployment rate No change in unemployment
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Increase in unemployment rate Decrease in unemployment rate
No change in unemployment rate Factory closes and outsources all jobs to China In May college students graduate and start look for jobs John quit his job goes back to school to work on a master’s degree New restaurant opens and hires staff George has been out of work for so long he stops looking for a job Rosie takes a year off after graduation to travel before looking for a job
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Use the information below to calculate the size of the labor force in Narvaizland.
2,000 500 +100 2,600 Full time workers ,000 Part time workers Retired workers People looking for work Teens working after school Stay at home moms
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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
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1. Stagflation – when inflation and unemployment rise simultaneously
Other business cycle measures 1. Stagflation – when inflation and unemployment rise simultaneously 2. Misery Index – a measurement that combines unemployment and inflation
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Decide if unemployment and inflation will increase or decrease or not change during phases of the business cycle listed. unemployment inflation Recession Stagflation Recovery peak trough
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Decide if unemployment and inflation will increase or decrease or not change during phases of the business cycle listed. unemployment inflation Recession increase decrease Stagflation Recovery peak No change trough
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