2.1-2.2 Circular Flow Model and GDP Guided Notes

Macroeconomics

the study of large economy as a whole (big picture)

• created during Great Depression b/c gov didn’t understand how to fix the economy w/ 25% unemployment

Purpose of Macroeconomics

1. Measure health of the whole economy

2. Guide government policies to fix problems

Private Sector

part of economy run by individuals/businesses

Public Sector

part of economy controlled by government

Factor Payments

payment for factors of production:

• rent, wages, interest, profit

Transfer Payments

when government redistributes income

• ex. welfare, social security, stimulus checks

Subsidies

government payments to businesses

Circular Flow Model

make sure u memorized the circular flow model diagram!

3 Major Economic Goals of every country

1. Promote economic growth (grow GDP)

2. Limit unemployment

3. Keep prices stable (limit inflation)

Goal 1: promote economic growth — How does a country measure economic growth?

• Most important measure of growth is GDP

GDP

Gross Domestic Product

• the dollar value of all final goods and services produced within a country’s borders in one year

How to use GDP

compare previous years, policy changes, and other countries

What is NOT included in GDP?

1. Intermediate Goods

2. Nonproduction Transactions

3. Non-Market or Illegal Activities

Intermediate Goods

• goods inside the final goods don’t count

  • ex. price of finished car, not the radio or tires

Nonproduction Transactions

• Financial Transactions (nothing produced)

  • ex. stocks, bonds, real estate

• Used Goods

  • ex. old cars, used clothes

Non-Market or Illegal Activities

• Things made at home - household production

• Ex. unpaid work, untaxed labor like babysitting, black markets, drugs

2 Ways of Calculating GDP

1. Expenditures Approach (more common)

2. Income Approach

both should generate the SAME number!

Expenditures Approach

add up all spending on final goods/services produced in a year

1. Consumer Spending

2. Investment

3. Government Spending

4. Net Exports

GDP = C + I + G + X_n

Consumer Spending

• 70% of US GDP

• Purchases of final goods by private individuals

  • ex. $5 Subway sandwich

Investment

• 15% of US GDP

• Businesses spending tools and equipment

  • ex. Walmart buys self-checkout machines

Government Spending

• 20% of US GDP

  • ex. schools, tanks, but NOT transfer payments

Net Exports

= Exports (X) - Imports (M)

• ex. value of 3 Ford Focuses minus 2 Hondas

Income Approach

Add up all income that resulted from selling all final goods/services produced in a year

(Factor Payments)

1. Wages Income

2. Rental Income

3. Interest Income

4. Profit

GDP = W + R + I + P

Wages Income

LABOR

Purchases of final goods by private individuals

• ex. $5 subway sandwich

Rental Income

LAND

Income earned from property owned by individuals

Interest Income

CAPITAL

earned from loaning money to businesses

Profit

ENTREPRENEURSHIP

Money businesses have after paying all their costs

Equation for Rate of Change in GDP/Output Growth

% Change in GDP = 100 * (Year2 - Year1)/Year1

Standard of Living

can be measured in part by how well the economy is doing, but it needs to be adjusted to reflect the size of the nation’s population

GDP per capita is best measure of this

GDP Per Capita

= GDP/Population

Identifies on average how many products each person makes

includes EVERYONE, not just the workforce

(Best way to measure standard of living)