Circular Flow Diagram Resource Market and Factor Market Households own factors of production – sell them to Firms Firms buy factors of production – pay wages, rent etc. Product Market Firms sell goods and services to households Households pay for goods and services

Circular Flow Write the following in the circular flow diagram: Households Entrepreneurship Firms Product Market Factor Market Land, labor, and Capital Money – wages etc. Goods and services Money – revenue etc. labor capital Land, Entrepreneurship Factor market wages money Money revenue Firms Households Product Market services Goods

Households Firms Sort GREEN cards by deciding if the action described would be taken by households or firms.

buy the factors of production Buyers in the resource market Households Firms buy the factors of production Buyers in the resource market Sell goods and services Sellers in the product market Pay wages for factors of production Owners of the factors of production Buyers in the product market Pay revenue in exchange for goods and services Sellers in the resource market Receive wages in the resource market

Product Market Resource Market Sort YELLOW cards by deciding if the action described would happen in the product or resource market.

Households buy consumer goods Firms receive money or revenue Product Market Resource Market households are buyers Firms are sellers Households buy consumer goods Firms receive money or revenue Firms are buyers Households supply land, labor, capital and entrepreneurship Households are sellers Households receive money

What doesn’t count Second hand goods Gifts or transfers (social security welfare etc.) Stock market transactions Unreported business activities Illegal activities Financial transactions between banks and businesses Non market activities like volunteer work

Formula The expenditures approach - C + Ig + G + Xn = GDP C = Personal Consumption a. 67% of the economy Purchases of finished goods and services NOT houses or other construction Ig = Gross Private Business Investment a. Factory equipment maintenance New factory equipment New Construction (houses or factory) Unsold inventory of products build in a year, but not sold in that year G = Government Spending Xn = Net foreign factor of Trade: Exports minus Imports Exports = dollars in Imports = dollars out Since WWII, Xn has usually been a negative number C + Ig + G + Xn = GDP

Fill in the Formula on your handout! GDP = C + Ig + G + Xn Government Spending Net Exports X - M Consumption Investment Fill in the Formula on your handout!

Determine where in the GDP formula each item on the WHITE cards fits. GDP = C + Ig + G + Xn Doesn’t Count in GDP Government Spending Net Exports X - M Consumption Investment Determine where in the GDP formula each item on the WHITE cards fits. Net exports Consumption Investment Government Spending

GDP = C + Ig + G + Xn Doesn’t Count in GDP Government Spending Consumer savings Transfer payments Stocks and bonds Used goods Clean air Intermediate good Government Spending Net Exports X - M Consumption Investment Net exports Consumption Government Spending Investment Consumer spending College textbook Home computer Ford F150 truck made in San Antonio but sold in Germany Exports – imports Marlboro cigarettes made in South Carolina and sold to French Smokers Mercedes made in Germany but sold in San Antonio (-M) New House Machine in a factory Capital goods Additions to business inventory New shopping mall built downtown Military spending An FBI agent’s paycheck

Nominal GDP vs. Real GDP Nominal GDP Total output of final goods and services produced by an economy in 1 year b. no adjustment for inflation Price index Used to measure price changes in an economy To construct select a year to serve as the base year Prices of other years are expressed as a percentage of the base year The value of the price index in the base year is always 100 Real GDP Adjusted for price changes over time Requires a price index GDP Deflator Price index used to “deflate” nominal GDP to reflect real growth

Real GDP VS. Nominal GDP Determine if the BLUE card is a characteristic of Nominal or Real GDP and sort them accordingly.

Adjusted for inflation Calculated by using a price index Real GDP VS. Nominal GDP Adjusted for inflation Calculated by using a price index Shows how prices have changed over time Measures changes in production not price increases May or may not increase when prices go up Shows the value of current products at current prices Increases when price goes up Calculated by adding the value of all items produced in an economy for a particular year

Use the information below to calculate Nominal GDP in Narvaizland Billions of dollars Exports $367 Dividends 60 Consumption of fixed capital 307 Corporate profits 203 Personal consumption 1810 Compensation of employees 1722 Government purchases 577 Rents 33 Taxes on production and imports 255 Gross private domestic investment 437 Imports 338

Narvaizland GDP Consumer Spending 1810 Gross Investment 437 Government Spending 577 Net Exports 29 GDP 2853 To find Net exports Exports – Imports 367 - 338 = 29

IV. Unemployment A. Unemployment rate = x 100 B. Who isn’t in the labor force 1. under 16 2. in the military 3. institutionalized 4. retired 5. homemakers 6. students 7. discouraged Workers Unemployed Labor force

Sort the RED cards based on what the action would do to the rate of unemployment. Increase in unemployment rate Decrease in unemployment rate No change in unemployment

Increase in unemployment rate Decrease in unemployment rate No change in unemployment rate Factory closes and outsources all jobs to China In May college students graduate and start look for jobs John quit his job goes back to school to work on a master’s degree New restaurant opens and hires staff George has been out of work for so long he stops looking for a job Rosie takes a year off after graduation to travel before looking for a job

Use the information below to calculate the size of the labor force in Narvaizland. 2,000 500 +100 2,600 Full time workers 2,000 Part time workers 500 Retired workers 350 People looking for work 100 Teens working after school 200 Stay at home moms 50

Business Cycle – alternating rises and declines in economic activity A. Peak – business activity has reached a temporary maximum B. Recession – decline in total output, income, employment, and trade C. Trough – output and employment are at their lowest levels D. Recovery – output and employment rise toward full employment

1. Stagflation – when inflation and unemployment rise simultaneously Other business cycle measures 1. Stagflation – when inflation and unemployment rise simultaneously 2. Misery Index – a measurement that combines unemployment and inflation

Decide if unemployment and inflation will increase or decrease or not change during phases of the business cycle listed. unemployment inflation Recession Stagflation Recovery peak trough

Decide if unemployment and inflation will increase or decrease or not change during phases of the business cycle listed. unemployment inflation Recession increase decrease Stagflation Recovery peak No change trough