Circular flow model
- Represents the transactions within an economy
- Goods and services flow clockwise
- Two markets that we talk about in circular flow model:
- Resource/Factor Market- Place where households sell resources and businesses buy resources
- Product Market- Place where goods and services are produced and are bought and sold to the households
- Three economic factors:
- Household- Person or group of people that share their income
- Government-
- Firm- Organization that produces goods and services for sale
GDP (Gross Domestic Product)
- Total dollar value of all goods and services produced within a country's borders within a given year
GNP (Gross National Product)
- Total value of all final goods and services produced by Americans in a year
Included in GDP:
- C+Ig+G+Xn
- C-Consumption
- 67% of the economy
- Final good or service
- Ig-Gross Private Domestic Investment
- Factory Equipment Maintenance
- New Factory Equipment
- Construction of Housing
- Unsold Inventory of Products Built in a Year
- G-Government Spending
- Military Spending
- FBISD Hires New Workers etc.
- Xn-Net Exports
- Exports-Imports
Excluded from GDP:
- Non-market Activities
- Volunteering
- Family Work
- Illegal drugs
- Intermediate Goods
- Goods and services that are purchased for resale or for further processing and manufacturing
- Anything that goes into making a product
- Avoid multiple or double counting
- Used or Secondhand Goods
- Clothing from a thrift shop
- Financial Transactions
- Stocks
- Bonds
- Real Estate
- Gifts or Transfer Payments
- Public
- Public transfer payments
- Recipients contribute nothing to the current production
- Welfare payments or social security
- Taxes paid by individuals are given to the public
- Private
- Private transfer payments produce no output
- Simply transfer funds from one private individual to another
- Ex: Scholarship
Expenditure Approach to GDP
- Add up market value on all foreign expenditures made on final goods and services made in a single year
- C+Ig+G+Xn=GDP
- Most reliable and popular method of calculating GDP
Income Approach to GDP
- Add up all of the income earned by households and firms in a single year
- W+R+I+P+Statistical Adjustments=GDP
- (Wages)+(Rents)+(Interest)+(Profit/Proprietor’s Income)+Statistical Adjustment
- Not very reliable since people don’t report all incomes
Formulas:
- Budget= Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collection
- If Number is Positive, It is a deficit
- If Number is negative, it is a surplus
- Trade= Exports-Imports
- GNP=GDP+Net Foreign Factor Payments
- NNP(Net National Product)= GNP-Depreciation
- NDP(Net Domestic Product) = GDP - Depreciation
- National Income =
- GDP-Indirect Business Taxes - Depreciation - Net Foreign Factor Payments
- Compensation of Employees + Rental Income + Interest Income + Proprietor’s Income + Corporate Profits
- Disposable Personal Income = National Income - Personal Household Taxes + Government Transfer Payments
Nominal GDP
- Value of output produced in current prices
- Price x Quantity = Nominal GDP
- Can increase from year to year if either output or price increase
Real GDP
- Value of output produced in constant or base year prices
- Price x Quantity = Real GDP
- Can increase from year to year only if output increases
- Output is measured by quantity
- Reason why real GDP reflects base year price is because it accounts for inflation
Year 1
|
Year 4
|
Year 1
|
Year 4
| |
Computers
|
10
|
17
|
$2,000
|
$2,200
|
Televisions
|
15
|
20
|
$500
|
$550
|
Nominal GDP Year 4 = $48,400
Real GDP Year 4 = $44,000
Price Index
- Measures inflation by tracking changes in the price in the market basket of goods compared with the base year
- (Price of market basket of goods in current year)/(Price of market of goods in base year) x 100 = Price Index
GDP Deflator
- Price index used to adjust from nominal to real GDP
- In the base year, GDP deflator will equal 100
- For years after the base year, the GDP deflator is greater than 100
- For years before the base year, the GDP deflator is less than 100
- (Nominal GDP)/(Real GDP) x 100 = GDP Deflator
Calculate Inflation
- ((New GDP Deflator) - (Old GDP Deflator)) / (Old GDP Deflator) x 100
