Download - How the U.S. Economy works
Circular Flow & GDP
How the U.S. Economy works
Economics
What is an Economy?
• The way goods, services & money flow through an economic system
The Circular Flow describes how goods, services & money flow through a market economy
2 Sides of a Market Economy
• Consumers decide what to BUY!– Demand side of economy
• Producers decide what to SELL (MAKE)– Supply side of economy
4 Factors of Production• Resources used to make goods & services1) Land- all basic natural resources2) Labor- human work/labor3) Physical Capital- previously produced goods4) Human Capital education, skills, etc…
To open a coffee shop:
Land = Beans & Rent store
Labor = worker Physical Capital =Coffee Machine
Human Capital = Skills of workers & owner of store
where any good or service is sold
Product & Factor Markets
Product Market:
Factor Market: where factors of production are exchanged
Consumers use product market
Producers use factor market
PRODUCERS CONSUMERS
Factors ofProduction
ProductMarket
CIRCULAR FLOW CIRCULAR FLOW of a Market Economyof a Market Economy
Supply
DemandSupply
Demand
(Land, Labor & Physical CapitalHuman Capital)
Money-$Money-$
Money-$Money-$
Circular Flow
Circular Flow Worksheet
Circular Flow
Price of Oil
$95 => $150
Affect onCircular Flow?
Circular Flow CONSUMERS
Factors ofProduction
Products
SupplySupply
DemandDemand
SupplySupply
Demand
Demand
(Land, Labor & Capital)
Money-$
Money-$Money-$
Money-$
Money-$
Money-$Money-$Money-$
PRODUCERS
Jobs are createdas Circular Flow ↑
Gross Domestic Product
Measuring Economic Growth
Measuring the Circular Flow• The total dollar value of economic output of the
circular flow is called Gross Domestic Product (GDP)
• The U.S. attempts to maximize GDP– Higher GDP growth leads to job creation
Circular FlowPRODUCERS CONSUMERS
Factors ofProduction
Products
Land, Labor & Capital
Jobs are createdAs GDP ↑
GDP growth: what is too high?
• The economy has an upper and lower “speed limit” of growth
• Too fast: If GDP grows above 5.0% per year, the economy may experience inflation– Prices rise
• Too slow: If GDP grows below 2%, not enough jobs are created– Unemployment rate increases
2012 = + 2.2%
2013 = + 1.5%2014 = + 2.4%
2015 = + 2.1%
GDP growth too slow to create enough jobs!
GDP = C + I + G + (X-M)
How GDP is calculated
Circular Flow CONSUMERS
Factors ofProduction
Products
SupplySupply
DemandDemand
SupplySupply
Demand
Demand
(Land, Labor & Capital)
Money-$
Money-$Money-$
Money-$
Money-$
Money-$Money-$Money-$
What goods count in GDP?
• Dollar Value of all FINAL new goods & services produced in USA over one year– Imports do not count– Used goods do not count
• Must avoid “double counting” in GDPExample: Steel used in automobiles
Count value of the entire car (final good)—not the parts
GDP = C + I + G + (X-M)
Circular Flow & GDP Review
Circular FlowPRODUCERS CONSUMERS
Factors ofProduction
Products
SupplySupply
DemandDemand
SupplySupply
Demand
Demand
(Land, Labor & Capital)
Money-$
Money-$Money-$
Money-$
Money-$
Money-$Money-$Money-$
Slow GDP Growth U.S. Economy in 2015
Factors Causing Slow Growth?
Recessions in EuropeSlow Growth in ChinaCollapsing Oil Prices => USA layoffsUnderemployment of Human Capital Declining Labor Force Participation
GDP = C + I + G + (X-M)
GDP Worksheet
• Circular Flow
GDP does NOT Measure:
• Leisure time– Vacation Days: Europe get many more than U.S. workers
• Hours Worked:– Work 80 hours vs. 40 hrs per week => GDP goes up
• What you produce– Guns vs. butter: all products count the same!
U.S. GDP in Comparison
• U.S. 15.6 Trillion
• Entire World: 65.0 Trillion• China 5.8 Trillion• Japan 5.6 Trillion• Germany 3.3 Trillion
24% of World GDP