1 / 43

Module 10

Module 10. The circular Flow Model and Gross Domestic Product. Warm Up. Make a list of all the things you spent money on in the past week. Be as specific as possible!. For all countries there are three major economic goals:. Promote Economic Growth Limit Unemployment

geoffrey-rios
Download Presentation

Module 10

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Module 10 The circular Flow Model and Gross Domestic Product

  2. Warm Up • Make a list of all the things you spent money on in the past week. Be as specific as possible!

  3. For all countries there are three major economic goals: • Promote Economic Growth • Limit Unemployment • Keep Prices Stable (Limit Inflation) • In this unit we will analyze how each of these are measured.

  4. There are 4 keys to the Unit • 1. Circular Flow Diagrams • (Module 10) • 2. Gross Domestic Production (GDP) • Module 10 & 11 • 3. Unemployment • (Module 12 & 13) • 4. Inflation • (Module 14 & 15)

  5. Economists collect statistics on production, income, investment, and savings. This is called national income accounting. • The most important measure of growth is GDP. • Gross Domestic Product (GDP) =dollar value of all final goods and services produced in a country in one year. • Dollar value- GDP is measured in dollars. • Final Goods-GDP does not include the value of intermediate goods. Intermediate goods are goods used in the production of final goods and services. • One Year-GDP measures annual economic performance.

  6. Circular Flow Diagram: Inflow of money into each market or sector must equal the outflow of money coming from that market or sector

  7. Keys to the Circular Flow Chart • 1. Chart has 4 sectors: • Households: are the demand side of markets purchasing goods and services • Firms: are on the supply side offering products to sale. • Government: purchases goods and services and collects taxes to spend in the econonmy • Rest of the world: Global trade and investments All are connected by 3 types of markets Factor; Market for Goods & Services; Financial Markets

  8. Expanded Circular Flow Diagram: 4 sectors of economy {households; firms; gov’t; rest of world} are all connected via 3 types of markets: {factor markets; markets for goods and services; and financial markets}

  9. Calculating GDP • Three Ways of calculating GDP: • Expenditure Approach (aka Aggregate Spending) • Income Approach (aka Sum of total factor income) • Total Value Approach of all final goods and services • All ways generate the same amount since every dollar spent is a dollar of income.

  10. Expenditures Approach-Add up all the spending on final goods and services produced in a given year. • GDP = C + I + G + Xn (exports-imports) • C IS CONSUMER SPENDING • I IS INVESTMENT SPENDING • G IS GOVERNMENT PURCHASES OF GOODS AND SERVICES • X IS EXPORTS - IMPORTS

  11. 2. Income Approach-Add up all the income that resulted from selling all final goods and services produced in a given year. • In other words, add up all the income earned by producers in the nation and that must equal the value of the products that they sold

  12. 3. PRODUCT APPROACH (aka net product or value added) • This is the sum of all the outputs of every enterprise in the nation • 1. Estimate Gross Value of Domestic Output • 2. Determine Intermediate Consumption (costs used to produce the final product • 3. Deduct Intermediate Consumption from the Gross Value GV= VALUE OF OUTPUT – VALUE OF INTERMEDIATE GOODS

  13. Expenditures Approach • Four components of GDP: • Consumer Spending (C) • Ex: $5 Spent on Pizza • Investments (I) -Businesses putting money back into their own business. • Government Spending • Ex: Bombs or tanks, NOT social security • Net Exports -Exports (X) – Imports (M) • Ex: Value of 2 Ford Focuses minus 3 Hondas • Remember: GDP = C + I + G + Xn (exports–imports)

  14. America’s trade balance (exports minus imports)

  15. What is NOT included in GDP • Intermediate Goods • No Multiple Counting, Only Final Goods • EX: Price of finished car, not the radio, tire, etc. • 2. Nonproduction Transactions • Financial Transactions (nothing produced) • Ex: Stocks, bonds, Real estate, social security • Used Goods • Ex: Old cars, used clothes • 3. Non-Market (Illegal) Activities • Ex: Illegal drugs, unpaid work

  16. Social security, welfare, and other transfer payments are not included in government expenditures. Recipients of transfer payments do not provide any current goods or services in exchanges for these payments. Hence, government expenditures on transfer payments do not involve the purchase of any new goods or services and are therefore excluded from the calculation of government expenditures.

  17. Calculating GDP using all 3 methods brings the same result

  18. Current Events • http://www.bbc.co.uk/news/business-24821383 • http://www.google.com/search?q=gdp&rls=com.microsoft:en-us&ie=UTF-8&oe=UTF-8&startIndex=&startPage=1&safe=active

  19. Economists keep track of the flows of money between sectors with the national income and product accounts, or national accounts. • Households earn income via the factor markets from wages. • Disposable income is allocated to consumer spending (C) and private savings. • Via the financial markets, private savings and foreign lending are channeled to investment spending (I), government borrowing, and foreign borrowing. • Government purchases of goods and services (G) are paid for by tax revenues and any government borrowing.

  20. Exports (X) generate an inflow of funds into the country from the rest of the world, but imports (IM) lead to an outflow of funds to the rest of the world. • Gross domestic product, or GDP, measures the value of all final goods and services produced in the economy. • GDP can be calculated in three ways: • add up the value added by all producers; • add up all spending on domestically produced final goods and services (GDP = C + I + G + X − IM); or • add up all the income paid by domestic firms to factors of production. These three methods are equivalent.

  21. For each situation, identify if it is included in GDP • $10.00 for movie tickets • $5M Increase in defense expenditures • $45 for used economics textbook • Ford makes new $2M factory • $20K Toyota made in Mexico • $10K Profit from selling stocks • $15K car made in US, sold in Canada • $10K Tuition to attend college • $120 Social Security payment to Bob • Farmer purchases new $100K tractor

  22. GDP=$7,125,010 • $10.00 for movie tickets • $5M Increase in defense expenditures • X $45 for used economics textbook • Ford makes new $2M factory • X $20K Toyota made in Mexico • X $10K Profit from selling stocks • $15K car made in US, sold in Canada • $10K Tuition to attend college • X $120 Social Security payment to Bob • Farmer purchases new $100K tractor

  23. Partner check • With your partner complete the circular flow handout. • Draw your own circular flow model that illustrates the Factor and Product markets and the flow of goods and services from each component.

  24. http://www.ted.com/talks/tim_jackson_s_economic_reality_check.htmlhttp://www.ted.com/talks/tim_jackson_s_economic_reality_check.html Making our world equitable

  25. Real vs. Nominal GDP (Module 11) Nominal GDP is GDP measured in current prices. It does not account for inflation from year to year. Real GDP adjusts for inflation and is the BEST MEASURE OF ECONOMIC GROWTH Per Capita GDP measures a country’s GDP by the size of its population. Divide the GDP for a year by the number of people in the nation to obtain the best measurement of a nations growth and productivity.

  26. Year 2 – Year 1 % Change in GDP = Year 1 How can you measure growth from year to year? Chain-Linking: Use a base year and a later year X 100

  27. Real vs. Nominal GDP Example 2008 10 cars at $15,000 each = $150,000 10 trucks at $20,000 each = $200,000 Nominal GDP = $350,000 The GDP for year 2008 shows the dollar value of all final goods produced. 2009 10 cars at $16,000 each = $160,000 10 trucks at $21,000 each= $210,000 Nominal GDP = $370,000 The nominal GDP in year 2009 is higher which suggests that the economy is improving. But how much is the REAL GDP? How do you get it? 2009 10 cars at $15,000 each = $150,000 10 trucks at $20,000 each= $200,000 REAL GDP = $350,000 Use 2008 Prices. The Real GDP for 2009 is the same as 2008 after we adjust for inflation. ------------------------------------------- Year 2-Year1 x 100 Year 1

  28. World GDP Distribution 2010 Nominal GDP

  29. The top 10 most populated countries 2011

  30. Top 10 Nations GDP Per Capita

  31. What is the most popular movie of all time? What is the problem with this method? NominalBox Office Receipts

  32. Real Box Office Receipts (adjusted for inflation)

  33. Real GDP “deflates” nominal GDP by adjusting for inflation in terms of a base year prices.

  34. % change GDP = yr2-yr1 x100 so real GDP yr2 (P1xQ2) – yr1 (P1xQ1) x 100 yr1 year 1(P1xQ1) Show how full GDP arrived at for both years and then show how arrive at % change.

  35. Nominal versus Real GDP in 2001, 2005, and 2009 demonstrates how our GDP actually went up much less during President Bush’s administration than actually believed as compared to when he began his presidential term.

  36. Does GDP accurately measure standard of living? Standard of living (or quality of life) can be measured, in part, by how well the economy is doing…but it does not measure a nation’s happiness just output

More Related