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Circular Flow & GDP

Circular Flow & GDP. How the U.S. Economy works. Branches of Economics. Microeconomics --studies economic behavior & decision making of small units: individuals, families, businesses Macroeconomics --studies economic behavior & decision making of entire economies.

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Circular Flow & GDP

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  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 Sony’s $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 PRODUCERS Circular Flow 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 FINALnew 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 measure—it does NOT Measure: Leisure time v. hours worked What is produced—shoes, guns, toys count the same How happy or content people are

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

  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 enoughjobs 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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