Econ 2.1

Unit Overview

• Title: Economic Indicators and the Business Cycle

• Copyright: Jacob Clifford 2024

Key Points from Unit 2

• Circular Flow Model: Shows GDP through both expenditures and income approaches.

• Producer Price Index (PPI): No calculation questions on PPI in the exam.

• FRQ Expectations: Always write down equations and show all calculations.

• Output Gaps: Terms "negative output gap" for recession and "positive output gap" for inflation may be used in the exam.

• Assessments: Online Personal Progress Check includes 20 MCQs and 2 FRQs.

Macroeconomics Fundamentals

• Definition: Study of the economy as a whole, looking at total aggregate activity rather than individuals or single businesses.

• Historical Context: Emerged during the Great Depression to address issues like high unemployment (25%).

• Objectives of Macroeconomics:

  • Measure overall economic health.

  • Guide governmental policies to address economic issues.

Circular Flow Model Components

• Private Sector: Controlled by individuals and businesses.

• Public Sector: Managed by the government.

• Factor Payments: Payments for production factors (rent, wages, interest, profit).

• Transfer Payments: Redistribution of income by the government (e.g., welfare).

• Subsidies: Government payments to support businesses.

Measuring Economic Growth

• Real GDP: Dollar value of all final goods/services produced in a country within a year.

• GDP Characteristics:

  • Measured in dollars.

  • Includes only final goods.

  • Production occurs within a country’s borders.

  • Annual measure of economic performance.

• Engagement Tip: Involve students in predicting GDP data to enhance interest.

GDP and Economic Health

• Uses of GDP:

  • Year-over-year comparison.

  • Evaluating policy effectiveness.

  • International comparison of economic health.

Factors Influencing GDP

• Economic Systems: More productive economies tend to have capitalist structures.

• Rule of Law: Political stability supports economic growth.

• Physical Capital: More tools and machines boost productivity.

• Human Capital: Education and training enhance productivity.

• Natural Resources: Access to resources impacts output and productivity.

GDP Calculation Methods

1. Expenditures Approach: Total spending on final goods and services.

2. Income Approach: Total income earned from production of goods and services.

3. Value-Added Approach: Summation of the dollar value added at each production stage.

Personal Consumption Trends

• Consumer Spending: Comprises durable goods, non-durable goods, and services.

• Investment Spending: Only includes business purchases of capital (not individual stocks).

• Government Spending: Purchases for public sector (excludes transfer payments).

Common Practice Questions and Exam Tips

• Understand the definitions and economic implications of transactions involving GDP.

• Be familiar with questions that require identifying factors included or excluded from GDP.

• Regularly practice with past FRQs and exam formats.