CIRCULAR FLOW MODEL

In the United States mixed economy, there are three sectors, or elements, that interact: households businesses government

Economists use the circular flow model to explain the interaction among these three sectors. Each sector of the economy contributes to another.

Circular Flow Model I. Circular Flow Model – A. Household & Firms – B. Factor Market 1.Where firms purchase or rent land 2.Firms hire workers & pay salaries for labor 3.Borrow money from households to purchase capital households interest or profits in return. C. Product Market 1.Households purchase products made by firms

Circular Flow Model II. Mixed Economy – A.Government in the Factor Market 1. Government purchases land, labor, & capital from households 2. Government collect taxes from firms. B. Government in the Product Market 1. Government purchases goods & services = building, telephones, computers, fax machines 2. Government provides goods & services = roads 3. Government collect taxes from households

Business Cycle

Measuring Economic Activities

Gross Domestic Product GDP total market value($ value) of all the goods & services produced within the borders of a nation during a specified period. Usually reported on an annual basis Per Capita GDP: nations GDP divided by its population

Gross National Product (GNP) total market value($ value) of all the goods & services produced from a nation during a specified period. It includes inside & outside of the country

Consumer Price Index (CPI) Calculated each month by the Bureau of Labor Statistics Price index determined by measuring the prices of a “market basket” Ex. Food, housing, medical care, entertainment

Business Cycle not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random & unpredictable.

4 Phases of the Business Cycle A sequence of four phases. Expansion Peak Contraction Trough

Phases of the Business Cycle 1.Expansion: speedup in the pace of economic activity & a rise in real GDP Recovery: right after a trough, economy is getting better Prosperity: right before a peak, economy is at its best economic growth 2.Peak: upper turning of a business cycle When GDP stops rising

Phases of the Business Cycle Contraction: slow down in the pace of economic activity Economic decline marked by falling GDP Recession: 6 straight months of contraction Depression: Especially long contraction Trough: lower turning point of a business cycle, where a contraction turns into an expansion GDP stops falling

**A trough & peak both represent a turning point in the business cycle**

National Debt

National Debt the total amount of money the Federal Government owes to bondholders. The debt is owed to investors who hold treasury bonds. If you invest in a treasury bond, the money that one uses to buy the bond is used to finance the National Government. A bond is essential an IOU issued by the government as a way for them to borrow money.

Problems of the National Debt Reduces the funds available for businesses to invest. The government must pay interest to bondholders, the more the government borrows, the more interest it has to pay. Roughly, to pay off the National Debt today, each citizen would have to pay just over $51,925

When President Bush took office over 10 years ago, the national debt was at $5.6 trillion; since then, big budget surpluses have collapsed into huge deficits, & the debt has shot up more than 50 percent. When Obama took office it was $9.986 trillion

Business Cycle Activity Please create the business cycle for the following items on a separate sheet of paper… Ski Boots Sun screen Wool socks Sandals Summer Shorts