Module 10 The Circular Flow and Gross Domestic Product

1. Module 10The Circular Flow and Gross Domestic Product • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

2. What you will learnin thisModule: • 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

3. The National Accounts • National Income and Product Accounts • Reliability

4. The Simple Circular-Flow Diagram

5. The Expanded Circular-Flow Diagram

6. 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

7. The Components of GDP

9. ModuleInterpretingReal GrossDomestic Product 11 • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

10. What you will learnin thisModule: • The difference between real GDP and nominal GDP • Why real GDP is the appropriate measure of real economic activity

11. What GDP Tells Us • Economic Size • Comparison Relative size of country indicates relative size of Gross Domestic Product

12. Real GDP: A Measure of Aggergate Output • Inflation’s effect on GDP • Aggregate Output

13. Calculating Real GDP

14. What Real GDP Doesn’t Measure • Real GDP v. GDP per capita • Living Standards • Limitations of Real GDP per capita

15. ModuleThe Meaningand Calculation of Unemployment 12 • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

16. What you will learnin thisModule: • 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

17. Defining and Measuring Unemployment • Employed • Unemployed • Labor Force • Labor Force Participation Rate • Unemployment Rate

18. 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

19. The Significance of the Unemployment Rate

20. Growth and Unemployment • Recessions and unemployment • Economic expansions and unemployment • Except • Relationship between economic growth and unemployment

21. ModuleThe Meaningand Calculation of Unemployment 13 • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

22. What you will learnin thisModule: • The three different types of unemployment and their causes • The factors that determine the natural rate of unemployment

23. Job Creation and Job Destruction • 4.5 million jobs destroyed in a ‘good’ month • Structural changes in the economy

24. Frictional Unemployment • Job Search • Frictional Unemployment • Duration • periods of low unemployment • periods of high unemployment

25. Structural Unemployment • Persistent Surplus • Structural Unemployment • Minimum Wages • Labor Unions • Efficiency Wages • Side Effects of Public Policy

26. Structural Unemployment

27. The Natural Rate of Unemployment • Natural Rate of Unemployment • Natural unemployment = Frictional unemployment + Structural unemployment • Cyclical Unemployment • Actual unemployment = Natural unemployment + Cyclical unemployment

28. 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

29. ModuleInflation:An Overview 14 • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

30. What you will learnin thisModule: • 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

31. The Level of Prices Doesn’t Matter... • Misconception • It’s all relative • Real Wage • Real Income

32. Price level in year 2 - Price level in year 1 X 100 Price level in year 1 ...But the Rate of Change of Prices Does • Inflation Rate • Inflation rate = • Shoe-Leather Costs • Hyperinflation • Menu Costs • Unit-of-Account Costs

33. Winners and Losers from Inflation • Nominal contracts • Nominal interest rate v. real interest rate

34. Inflation is Easy; Disinflation is Hard • Disinflation • The cost of disinflation • Policy response to inflation

35. ModuleThe Measurementand Calculation of Inflation 15 • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

36. What you will learnin thisModule: • 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

37. Price Indexes and the Aggregate Price Level • Aggregate Price Level

38. Market Baskets and Price Indexes • Market Basket

39. Price index in year 2 - Price index in year 1 Cost of market basket in a given year Inflation Rate = Price Index in given year = X 100 X 100 Price index in year 1 Cost of market basket in base year Market Baskets and Price Indexes • Price Index

40. The Consumer Price Index • Consumer Price Index (CPI) • What is it?

41. Other Price Measures • Producer Price Index (PPI) • GDP deflator • Coincidence of inflation measures