Circular Flow
- Circular flow represents transactions within an economy, looking in a broad sense
- The goods and services flow clockwise in a circular flow model
Economic Factors
- Households- person or group of people that share their income
- Government: can refer to local or national
- Firm- an organization that produces goods & services for sale
Markets
- Resource/Factor Market- households sell resources and firms buy them
- Product Market- firms produce goods and services, and households buy them
Gross Domestic Product
- market value of all final goods and services produced within a nation within a given year
Not Included in GDP
- Intermediate goods- goods that require further processing before they are ready for final use
- Used/Secondhand goods- trying to avoid double counting
- Purely financial transactions- stocks and bonds
- Unreported business activity- unreported tips; underground market
- Non-market activities-anything you do for yourself; volunteering
- Transfer payments- public such as social security or private transfer payments such as scholarships
Included in GDP
- C- personal consumption expenditures- wages, etc.
- Ig-Gross private domestic investments- new factory equipment, factory equipment maintenance, construction of housing, unsold inventory of products built in a year
- G- government spending
- Xn- net exports- (exports-imports)
Formulas
- Expenditure approach- C + Ig + G + Xn
- Income Approach- W(wages) + R(rent) + I(interest) + P(profits)
- Nominal GDP- Price of current year x quantity of current year
- Real GDP- Price of base year x quantity of current year
- Net Domestic Product(NDP) - GDP- depreciation
- Net national product(NNP)- GNP- depreciation
- GNP- GDP + Foreign factor payment
- Budget surplus/deficit- government purchases- government taxes and fees collection + government transfer payments
- Trade Surplus/deficit- Exports- imports
- National income- GDP- indirect business taxes-depreciation-net foreign factor payment
- Disposable income- national income-personal household taxes + government transfer payments
Inflation
- general increase in prices and fall in the purchasing value of money
GDP Deflator
- price index- used to adjust from nominal to real
- (nominal GDP/ real GDP) x 100
- in base year, the GDP deflator will always equal 100
- for years after the base year, GDP deflator is greater than 100
- for years before the base year, GDP deflator is less than 100
Consumer Price Index (CPI)
- most commonly used measurement for inflation
- measures the cost of a market basket of goods for a typical urban American family
- (cost of market basket of goods in given year/ cost of market basket of goods in base year) x 100
Inflation
- [(price index in year 2 - price index in year 1) / price index in year 1] x 100
Interest Rate
- Nominal Interest Rate- percentage increase in money the borrower must pay the lender for a loan; not adjusted for inflation; Expected interest rate + inflation premium
- Real Interest Rate- percent increase in purchasing power the borrower must pay the lender for a loan; adjusted for inflation; nominal interest rate- inflation
- Hurt by inflation- savers, those on a fixed income, creditors and debtors
- Helped by inflation- debtors
- Cost of living adjustment(COLA)- automatic wage increase when inflation occurs
Unemployment
- failure to use available resources, particularly labor to produce desired goods and services
- Underemployment- not using resources effectively
Labor Force
- above 16 years old of age
- able/ willing to work
- employed and unemployed
- Not in labor force- military, students, retired, disabled, home makers, mental institutions, people in prison, those not looking for a job
Unemployment Rate
- [ # of employed / ( # of employed + # of unemployed)] x 100
- full employment/ natural rate of employment- 4-5 percent
Types of Unemployment
- Frictional- searching for a job, temporarily unemployed or in between jobs; have transferable skills; better opportunity; HS and college graduates
- Structural- changes in structure of the labor force, which makes some skills and jobs obsolete; does not have transferable skills
- Seasonal- depends on the time of year and nature of the job, school bus drivers, life guards, etc.
- Cyclical- results from economic downturn such as a recession, as demand for goods fall, demand for labor falls as well, and workers are laid off
- Frictional + Structural = NRU
- Full employment- no cyclical unemployment
- GDP Gap- amount by which actual GDP falls short of potential GDP
- Okun's Law- for every 1% in which actual unemployment rate exceeds NRU, a GDP gap of about 2% exists
- Rule of 70- amount of years to double income= 70/ growth rate
