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Circular Flow

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Circular Flow & GDP How the U.S. Economy works Branches of Economics Microeconomics --studies economic behavior & decision making of small units: individuals ... – PowerPoint PPT presentation

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Title: Circular Flow


1
Circular Flow GDP
  • How the U.S. Economy works

2
Branches of Economics
  • Microeconomics
  • --studies economic behavior decision
    making of small units individuals, families,
    businesses
  • Macroeconomics
  • --studies economic behavior decision
    making of entire economies

Analyzing Sonys 100 price cut for PS3
Analyzing how a federal income tax cut has
affected unemployment
3
Key Concept Circular Flow
  • Describes how goods, services and money flow
    through a free market economy

4

Product Market
Circular Flow
PRODUCERS
CONSUMERS
Factor Market
5
The U.S. Free Market Economy
Boeing cuts 1000 jobs
Price of oil goes down
Product Market Where goods services sold
Make products
Pay for products
CONSUMERS
Circular Flow
PRODUCERS
labor
Wages/paycheck
Factor Market (Factors of Production) --land,
labor, capital, education/skills are exchanged
Income tax rebate 700
Interest rates go up
6
Measuring the Circular Flow GDP
  • The total dollar value of economic output of the
    circular flow is called Gross Domestic Product
    (GDP)
  • Dollar Value of all FINAL new goods services
    produced in USA over one year

7
How to Calculate GDP
GDP C I G (X-M)
8
GDP is a very IMPERFECT measureit does NOT
Measure
  • Leisure time v. hours worked
  • What is producedshoes, guns, toys count the same
  • How happy or content people are

9
GDP Growth Rate
GDP s are hard for our minds to grapple
with GDP increased from 13.2 trillion to 13.5
trillion DOES NOT COMPUTE!
  • Instead we use the percentage growth rate
    (measured quarterly and annually)
  • Example GDP grew last year at a 2.2 rate last
    quarter

10
GDP growth Speed Limits
  • Too fast If GDP grows above 5.0, the economy
    may experience inflation
  • Prices rise
  • Too slow If GDP grows below 2, not enough jobs
    are created
  • Unemployment rate increases

11
Gross Domestic Product (GDP) Growth Rate
  • Slowest ever
  • -13.0 (1932)
  • Fastest ever
  • 18.5 (1942)
  • Historical average
  • 2.5-3.0

Recent GDP Growth Rates 1Q 2008 0.9 2Q
2008 2.8 3Q
2008 -0.5 4Q 2008 -6.5
1Q 2009 -6.4
2Q 2008 -0.7
3Q 2008 2.2
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