Transcript Circular Flow & GDP

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) Land2) Labor3) Physical Capital4) Human Capital
To open a coffee shop:
all basic natural resources
human work/labor
previously produced goods
education, skills, etc…
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
Product
Market
PRODUCERS
Circular Flow
Factors of
Production
(Land, Labor & Physical Capital
Human Capital)
CONSUMERS
Circular Flow Worksheet
Circular Flow
Jobs are created
as Circular Flow ↑
Price of Oil
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CONSUMERS
Circular Flow
PRODUCERS
Affect on
Circular Flow?
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Factors of
Production
(Land, Labor & Capital)
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 ↑
Products
PRODUCERS
Circular Flow
Land, Labor & Capital
Factors of
Production
CONSUMERS
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%
2013 = + 1.5%
2012 = + 2.2%
2015 = + 2.1%
How GDP is calculated
GDP = C + I + G + (X-M)
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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
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GDP = C + I + G + (X-M)
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Circular Flow
PRODUCERS
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Factors of
Production
(Land, Labor & Capital)
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
– 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
24% of World GDP
• U.S.
15.6
Trillion
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5.8
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3.3
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Trillion
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Entire World:
China
Japan
Germany