Module 10 The Circular Flow and Gross Domestic Product
description
Transcript of Module 10 The Circular Flow and Gross Domestic Product
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Module 10The Circular Flow and Gross Domestic Product
•KRUGMAN'S•MACROECONOMICS for AP*
Margaret Ray and David Anderson
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What you will learnin this Module:• How economists use aggregate measures to
track the performance of the economy
• The circular flow diagram of the economy
• What gross domestic product, or GDP, is and the three ways of calculating it
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• National Income and Product Accounts
• Reliability
The National Accounts
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The Simple Circular-Flow Diagram
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The Expanded Circular-Flow Diagram
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Gross Domestic Product
• Final goods and services
• Intermediate goods and services
• GDP
• Value of all goods and services produced (value added approach)
• Aggregate Spending (C + I + G + XN)
• Total Factor Income
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The Components of GDP
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What's Included
Domestically produced final goods and services, including capital goods, new construction of structures, and
changes to inventories
Not Included
Intermediate goods and services
Inputs
Used goods
Stocks & Bonds
Foreign produced goods & services
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ModuleInterpretingReal GrossDomestic Product
•KRUGMAN'S•MACROECONOMICS for AP*
11
Margaret Ray and David Anderson
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What you will learnin this Module:• The difference between real GDP and
nominal GDP
• Why real GDP is the appropriate measure of real economic activity
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What GDP Tells Us
• Economic Size
• Comparison
Relative size of country indicates relative size of Gross Domestic Product
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• Inflation’s effect on GDP
• Aggregate Output
Real GDP: A Measure of Aggergate Output
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Calculating Real GDPYear Tons of
CornPrice per
TonTons of
SoybeansPrice
per TonNominal
GDPReal GDP Base Year
= 2007
2007 100 $100 80 $50 (100*$100) +
(80*$50) = $14,000
$14,000
2008 110 $110 80 $100 (110*$110) +
(80*$50) = $20,100
(110*$100) + (80*
$50) = $15,000
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What Real GDP Doesn’t Measure
• Real GDP v. GDP per capita
• Living Standards
• Limitations of Real GDP per capita
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ModuleThe Meaningand Calculation of Unemployment
•KRUGMAN'S•MACROECONOMICS for AP*
12
Margaret Ray and David Anderson
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What you will learnin this Module:• How unemployment is measured
• How the unemployment rate is calculated
• The significance of the unemployment rate for the economy
• The relationship between the unemployment rate and economic growth
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Defining and Measuring Unemployment
•Labor Force Participation Rate
•Unemployment Rate
•Employed
•Unemployed
•Labor Force
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The Significance of the Unemployment Rate
• Indicator of employment opportunity
• Overstating the true level of unemployment
• Understating the true level of unemployment
• discouraged workers
• marginally attached workers
• underemployed
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The Significance of the Unemployment Rate
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Growth and Unemployment
• Recessions and unemployment
• Economic expansions and unemployment
• Except
• Relationship between economic growth and unemployment
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ModuleThe Meaningand Calculation of Unemployment
•KRUGMAN'S•MACROECONOMICS for AP*
13
Margaret Ray and David Anderson
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What you will learnin this Module:• The three different types of unemployment
and their causes
• The factors that determine the natural rate of unemployment
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Job Creation and Job Destruction
•4.5 million jobs destroyed in a ‘good’ month
•Structural changes in the economy
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Frictional Unemployment
• Job Search
• Frictional Unemployment
• Duration
• periods of low unemployment
• periods of high unemployment
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Structural Unemployment
• Persistent Surplus
• Structural Unemployment
• Minimum Wages
• Labor Unions
• Efficiency Wages
• Side Effects of Public Policy
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Structural Unemployment
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The Natural Rate of Unemployment
• Natural Rate of Unemployment
Natural unemployment = Frictional unemployment + Structural unemployment
• Cyclical Unemployment
Actual unemployment = Natural unemployment + Cyclical unemployment
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Changes in the Natural Rate of Unemployment
• Natural rate of unemployment changes
• Changes in Labor Force Characteristics
• Changes in Labor Market Institutions
• Changes in Government Policies
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ModuleInflation:An Overview
•KRUGMAN'S•MACROECONOMICS for AP*
14
Margaret Ray and David Anderson
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What you will learnin this Module:• The economic costs of inflation
• How inflation creates winners and losers
• Why policy makers try to maintain a stable rate of inflation
• The difference between real and nominal values of income, wages, and interest rates
• The problems of deflation and disinflation
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The Level of Prices Doesn’t Matter...
•Misconception
•It’s all relative
•Real Wage
•Real Income
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...But the Rate of Change of Prices Does
Price level in year 2 - Price level in year 1Price level in year 1
X 100
• Inflation Rate
Inflation rate =
•Shoe-Leather Costs
•Hyperinflation
•Menu Costs
•Unit-of-Account Costs
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Winners and Losers from Inflation
• Nominal contracts
• Nominal interest rate v. real interest rate
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Inflation is Easy; Disinflation is Hard
• Disinflation
• The cost of disinflation
• Policy response to inflation
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ModuleThe Measurementand Calculation of Inflation•KRUGMAN'S•MACROECONOMICS for AP*
15
Margaret Ray and David Anderson
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What you will learnin this Module:• How the inflation rate is measured
• What a price index is and how it is calculated
• The importance of the consumer price index and other price indexes
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• Aggregate Price Level
Price Indexes and the Aggregate Price Level
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Market Baskets and Price Indexes
•Market Basket
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Market Baskets and Price Indexes
•Price Index
Price Index in given year =Cost of market basket in a given year
Cost of market basket in base year X 100
Inflation Rate =Price index in year 2 - Price index in year 1
Price index in year 1 X 100
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The Consumer Price Index
•Consumer Price Index (CPI)
•What is it?
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Other Price Measures
• Producer Price Index (PPI)
• GDP deflator
• Coincidence of inflation measures