1. The Circular Flow Model, Productivity, and Economic Indicators
Economics 101
The Circular Flow Model, Productivity, and Economic Indicators

2. The Circular Flow of Economic Activity

3. There are two types of markets: factor markets & product markets

4. Factor Markets –
factors of production are bought and sold in order to produce consumer goods and services

5. If you have a job, you are participating in the Factor Market

6. producers sell goods and services to consumers
Product Markets –
producers sell goods and services to consumers

7. When you purchase goods & services, you are participating in the Product Market

8. The interaction between the factor market and the product market leads to a circular flow of economic activity

10. Households are families … both in the factor and product markets

11. What is Productivity?

12. It reflects how efficiently resources are being used
Productivity –
A measure of the amount of output produced by a given amount of inputs in a specific period of time
It reflects how efficiently resources are being used

13. When a nation’s total output of goods and services increases over time, the economy grows (this is good)

14. When the economy grows, businesses are producing more goods and services, and they hire more workers

15. People then have more money and buy more

16. What contributes to Economic Growth?

17. Increase in the number of inputs Innovation
Increased investment
Increase in the number of inputs
Innovation
Specialization (division of labor)

18. Workers also specialize because they earn more by doing the things they do well; it is more efficient to specialize than to do everything for ourselves

19. Investment in job training and employee health care tends to increase productivity

20. How do we measure how well the economy is performing
How do we measure how well the economy is performing? There are several “indicators” of economic performance The first we will study is Gross Domestic Product

21. Gross Domestic Product (GDP) is one measure of the size of the economy

22. GDP is the total dollar value of all final goods and services produced in the country over a given period of time It can be calculated monthly, quarterly (every four months), or yearly

23. GDP is a monetary measure It is a dollar amount

24. For example, the GDP of the United States in 2015 …
$18 Trillion

25. Visualizing One Trillion Dollars

26. It is calculated by the Department of _____________ (one of the 15 executive departments of the federal government)

27. Here’s a simplified way of how the Department of Commerce calculates GDP

28. only final sales are counted as part of GDP

29. Re-sales are NOT counted in GDP

30. GDP is an important measure of the standard of living for a country, the quality of life based on the possession of necessities and luxuries that make life easier

31. Whenever GDP grows faster than population, there are more goods/services, on average, for each of us to enjoy

32. If the next month’s GDP is higher than the previous one, then the economy is expanding

33. The United States has the world’s largest Gross Domestic Product

34. A better indication than total GDP of a country’s economy is per capita GDP

35. Per capita GDP measures the amount of GDP in a country per person

36. Per capita GDP in the U.S. in 2015 was…
$56, 155

37. Per capita GDP in Mexico in 2015 was…
$9,005

38. So, you could conclude from per capita GDP that…
So, you could conclude from per capita GDP that…. the United States has more than five times the standard of living as Mexico

39. Our economy is not always expanding

40. The economy goes through alternating periods of growth and decline called the business cycle

41. An economic expansion takes place when real GDP goes up

42. At some point, real GDP reaches a peak, or the highest point in an expansion

43. Then it starts to decline

45. A recession takes place when real GDP goes down for six straight months

46. The economy declines, and many people lose their jobs

47. The unemployment rate is another measure of our economy’s performance

48. The unemployment rate is the percentage of people in the civilian labor force who are not working but are looking for jobs

49. Unemployment
The civilian labor force includes all civilians 16 years old or older who are either working or looking for work

50. The unemployment rate is often a lagging indicator of economic growth In other words, the job rate does not increase until after the economy is growing again

51. There are five types of unemployment:
Cyclical unemployment
Seasonal unemployment
Frictional/Search unemployment
Structural unemployment
Hidden unemployment

52. Cyclical is due to a downturn in the economy and people lose their jobs (through no fault of their own)

53. Seasonal unemployment occurs during different times of the year

54. Frictional (or Search unemployment) occurs when someone is laid off, fired, or quits and is searching for a job but still doesn’t have one They are in-between jobs!

55. Structural unemployment is the worst, most devastating type of unemployment the workers no longer possess the necessary skills to operate effectively in that industry (because the structure of the industry has changed) They have to be retrained or fired It’s easier to just hire new workers who have those skills

56. Structural unemployment occurs when jobs are outsourced and shipped overseas Those jobs are not coming back Entire communities are shut down when the local plant or mill shuts down

57. Many industries in the northeast (rustbelt) have structural unemployment

59. Hidden unemployment includes discouraged workers … they have left the job market because they have quit looking for work They are still unemployed, but they are not counted in the unemployment stats

60. Another measure of an economy’s performance is the rate of inflation

61. What is inflation?

62. Inflation is a sustained increase in the general level of prices

63. the purchasing power of your dollar has fallen due to inflation

64. The money will buy less than before inflation

65. By the way, do not let someone tell you that a dollar is only worth $
By the way, do not let someone tell you that a dollar is only worth $.25 today

66. A dollar is worth a dollar

67. It may have the purchasing power of what $
It may have the purchasing power of what $.25 had fifty years ago, but it is still a dollar

68. Inflation has to do with purchasing power. How much can that dollar buy?

69. To track inflation, the government samples prices every month for about 400 products commonly used by consumers

70. These prices make up the consumer price index (CPI), which is a measure of the price level

71. The rate of inflation is the change in the average level of prices as measured by the CPI

72. Another indicator of economic performance is the stock market

73. Buying stock in a corporation is an investment

74. Investors can earn profits from stocks in two ways: dividends & capital gains

75. Dividends are a share of a corporation’s profits that are distributed to stockholders

76. A capital gain is when you sell the stock for more than it cost you to buy

77. How do you make money from selling your investment? Buy low, sell high!

78. Most stocks in the United States are traded (bought and sold) on the… New York Stock Exchange (NYSE) American Stock Exchange or an electronic stock market like the NASDAQ

79. The NYSE is the largest stock exchange in the world by dollar volume and has 2,764 listed securities. It ranks fourth in the world in terms of company listings with 3,200 companies

81. “Wall Street” is the home of the NYSE as well as the major financial institutions in our country

82. Wall Street is the financial hub (center) of our nation

83. AMEX's core business has shifted over the years, although it continues to trade small to mid-size stocks. Most of its companies are generally smaller compared to the NYSE and NASDAQ

84. NASDAQ is the largest electronic screen-based equity securities trading market in the United States. With approximately 3,200 companies, it has more trading volume per day than any other stock exchange in the world

85. Stock indexes measure how well the stock markets are doing each day!

86. Stock indexes are statistical measures that track stock prices over time

87. Stock market indexes select a group of stocks to represent an entire sector of the market

88. The Dow Jones Industrial Average (DJIA) is composed of only 30 stocks The DJIA represents the largest industrial companies (the "blue chip" stocks of the manufacturing sector)

89. Blue chip stock is the stock of a well-established company having stable earnings and no extensive liabilities. The term derives from casinos, where blue chips stand for counters of the highest value

90. Dow Jones Industrial Average

91. The Standard & Poor’s 500 Index uses 500 stocks, of the largest established companies, from every sector of the economy

92. The NASDAQ Composite Index is made up of about 4,000 stocks primarily junior-grade companies, that have a lot of growth potential but are often not as old, or financially sound, as "blue chip" companies

93. Much of the time, these three major stock market indexes move in sync with each other, which makes their message clear

94. These indexes reflect the general well-being of the stock market as a whole, and therefore one indicator of how well the economy is doing as a whole

95. If investors expect rapid economic growth, high profits, and low unemployment, then stock prices tend to rise in what is called a “bull market”

96. A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future capital gains

97. If investors are pessimistic, stock prices tend to fall in what is called a “bear market”

98. So, in summation, if investors think the economy is going to perform well, the stock indexes will be high When the stock indexes drop, investors think the economy is not going to perform well