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

2. 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

3. 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. 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

5. 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

6. 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)

7. Circular Flow Worksheet

8. 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

9. Gross Domestic Product
Measuring Economic Growth

10. 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

11. 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

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

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

14. 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

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

16. 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)

17. GDP Worksheet
Circular Flow

18. 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!

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