Circular Flow & GDP

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

2. What is an Economy? • The way goods, services & moneyflow 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 Capitaleducation, 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 Market: Factor Market: Product & Factor Markets where any good or service is sold where factors of production are exchanged Consumers use product market Producers use factor market

6. Money-$ Money-$ Demand Supply Supply Demand Money-$ Money-$ CIRCULAR FLOW of a Market Economy Product Market Circular Flow CONSUMERS PRODUCERS Factors of Production (Land, Labor & Physical Capital Human Capital)

7. Circular Flow Worksheet

8. Jobs are created as Circular Flow ↑ Affect on Circular Flow? Circular Flow Price of Oil $95 => $150 PRODUCERS

9. Gross Domestic Product Measuring Economic Growth

10. Products Jobs are created As GDP ↑ PRODUCERS CONSUMERS Circular Flow Land, Labor & Capital Factors of Production 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

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 enoughjobs 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 FINALnew 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 DecliningLabor Force Participation GDP = C + I + G + (X-M)

17. GDP Worksheet • Circular Flow

18. 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!

19. 24% of World GDP U.S. GDP in Comparison • U.S. 15.6 Trillion • Entire World: 65.0 Trillion • China 5.8 Trillion • Japan 5.6 Trillion • Germany 3.3 Trillion