Circular Flow, Business Cycle, and GDP

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Macroeconomics
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the study of the large economy as a whole
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Why study macroeconomics?
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born during the great depression; government didn’t understand how to fix a depressed economy with 25% unemployment
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Macroeconomics was created to…
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1) measure the wealth of whole economy 2) guide government policies to fix problems
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The product Market
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the “place” where goods and services produced by businesses are sold to household
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The Resource (factor) Market
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the “place” where resources (land, labor, capital, and entrepreneurship) are sold to businesses
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Private Sector
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run by individuals and businesses
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Public Sector
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run by the government
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Factor payments
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payment for factors of production, namely rent, wages, interest, and profit
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Transfer Payments
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when the government redistributes income
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Examples of transfer payments
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-welfare -social security
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Subsidies
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government payments to businesses
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Three major economic goods
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1. promote economic growth 2. limit unemployment 3. keep prices stable (limit inflation)
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Peak (Business cycle)
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-temporary max in GDP -unemployment rate = low -inflation rate = high
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Recession (Business cycle)
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-6 month period of decline in Real GDP (if really bad=depression) -increase in unemployment
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Trough (Business cycle)
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-bottom of business cycle -unemployment rate=high -inflation rate=low
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Recovery (Business cycle)
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economy = returning to full employment
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Why has the business cycle become less severe?
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technological advancements in supply- chain management and structural changes in US economy (irregularity in investment; changes in productivity; changes in total spending/aggregate demand; durable goods manufacturing is most susceptible to the effects of the business cycle)
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Economic goal #1
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promote economic growth
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GDP
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the market value of all final goods and services produced within a nation in a year
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GDP measures…
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-aggregate spending, income and output -how each nation is doing financially by comparing previous years, comparing effects of policy changes, and comparing other countries
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GDP counts…
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all final, domestic production for which there’s a market transaction in that year
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GDP does NOT count…
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used and intermediate goods in order to avoid double-counting
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Aggregate Spending Approach
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GDP=C (consumption) + I (investment) + G (government spending) + Xn (net exports)
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Consumption (largest component of GDP)
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Consumer spending on durable goods, non-durable goods, services
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Gross Private Investment
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-spending in order to increase future output or productivity -business spending on capital, new construction, change in unsold inventories
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Government Spending
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-all levels of government spending on final goods and services and infrastructure count toward GDP -government transfer payments do not count toward GDP
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Net Exports (Exports-Imports)
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-Exports create a flow of money to the US in exchange for domestic production -Imports create a flow of money away from the US in exchange for foreign production
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Aggregate Income Approach
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Income= r + w + i + p= factor payments
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Aggregate Income Approach- R
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rent (payment for natural resources)
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Aggregate Income Approach- W
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wages (payments for labor)
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Aggregate Income Approach- I
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interest (payment for capital)
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Aggregate Income Approach- P
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profits (payments for entrepreneurship)
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Nominal GDP
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current GDP at today’s prices
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What’s wrong with nominal GDP?
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Nominal GDP may overstate the value of production because of the effects of inflation
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Real GDP
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current GDP with a fixed dollar
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Why is real GDP more important?
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Real GDP holds the value of the dollar constant and is useful for making year to year comparisons
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What is the best measure of individual well being?
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GDP per capita provides a better measure of individual well-being than GDP
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How do you measure growth from year to year?
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% change in GDP = [(year 2 – year 1)/year 1] *100
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As GDP increases…
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the burden of scarcity decreases for a society

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