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Circular Flow & GDP

Learn how goods, services, and money flow through the market economy circular flow. Discover GDP calculation, factors affecting growth like recessions and oil prices, and why job creation is crucial.

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Circular Flow & GDP

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  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

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