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I. Circular Flow DiagramA. Resource Market and Factor Market

1. Households own factors of production – sell them to Firms2. Firms buy factors of production – pay wages, rent etc.

B. Product Market1. Firms sell goods and services to households2. Households pay for goods and services

Circular Flow

Write the following in the circular flow diagram:

HouseholdsEntrepreneurshipFirmsProduct MarketFactor MarketLand, labor, and CapitalMoney – wages etc.Goods and servicesMoney – revenue etc. FirmsHouseholds

Factormarket

Product Market

Land, labor capital Entrepreneurship

money wages

Moneyrevenue

Goods services

Households

Firms

Sort GREEN cards by

deciding if the action

described would be

taken by households or

firms.

Households

Firms

• 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

• 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

Product Market Resource Market

Sort YELLOW cards by

deciding if the action

described would happen

in the product or resource

market.

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 count1. Second hand goods2. Gifts or transfers (social security welfare etc.)3. Stock market transactions4. Unreported business activities5. Illegal activities6. Financial transactions between banks and

businesses7. Non market activities like volunteer work

The expenditures approach - C + Ig + G + Xn = GDP

1. C = Personal Consumption a. a. 67% of the economyb. Purchases of finished goods and servicesc. NOT houses or other construction

2. Ig = Gross Private Business Investmenta. Factory equipment maintenanceb. New factory equipmentc. New Construction (houses or factory)d. Unsold inventory of products build in a

year, but not sold in that year3. G = Government Spending4. Xn = Net foreign factor of Trade: Exports

minus Importsa. Exports = dollars inb. Imports = dollars outc. Since WWII, Xn has usually been a

negative number

C + Ig + G + Xn = GDP

Formula

GDP = C + Ig + G + XnConsu

mptio

n

Investm

ent

Govern

ment S

pend

ing

Net E

xports

X - M

Fill in the Formula on your handout!

GDP = C + Ig + G + XnConsu

mptio

n

Investm

ent

Govern

ment S

pend

ing

Net E

xports

X - M

Consumption

Doesn’t Count in GDP

Investment Government

Spending

Net exports

Determine where in

the

GDP form

ula each item

on the W

HITE cards fits.

GDP = C + Ig + G + XnConsu

mptio

n

Investm

ent

Govern

ment S

pend

ing

Net E

xports

X - M

Consumption

Doesn’t Count in GDP

InvestmentGovernment

Spending

Net exports

• New House• Machine in a

factory• Capital goods• Additions to

business inventory

• New shopping mall built downtown

• Consumer spending• College textbook• Home computer • Military

spending• An FBI agent’s

paycheck

• 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)

• Consumer savings• Transfer payments• Stocks and bonds• Used goods• Clean air• Intermediate good

Nominal GDP vs. Real GDP1. Nominal GDP

a. Total output of final goods and services produced by an economy in 1 year

b. no adjustment for inflation2. Price index

a. Used to measure price changes in an economy

b. To construct select a year to serve as the base year

c. Prices of other years are expressed as a percentage of the base year

d. The value of the price index in the base year is always 100

3. Real GDPa. Adjusted for price changes over timeb. Requires a price index

4. GDP Deflatora. 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.

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

Billions of dollars

Exports $367Dividends 60Consumption of fixed capital 307Corporate profits 203Personal consumption 1810Compensation of employees 1722Government purchases 577Rents 33Taxes on production and imports 255Gross private domestic investment 437Imports 338

Use the information below to calculate Nominal GDP in Narvaizland

Consumer Spending 1810Gross Investment 437Government Spending 577Net Exports 29

GDP 2853To find Net exportsExports – Imports367 - 338 = 29

Narvaizland GDP

IV. UnemploymentA. Unemployment rate = x 100

B. Who isn’t in the labor force1. under 162. in the military3. institutionalized4. retired5. homemakers6. students7. discouraged Workers

UnemployedLabor force

Increase in unemployment

rate

Decrease in unemployment rate

No change in unemployment

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

rate

• Rosie takes a year off after graduation to travel before looking for a job

• New restaurant opens and hires staff

• George has been out of work for so long he stops looking for a job

• 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

Use the information below to calculate the size of the labor

force in Narvaizland.

Full time workers 2,000Part time workers 500Retired workers 350People looking for work 100Teens working after school 200Stay at home moms 50

Labor Force

2,000 500 +100 2,600

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

Other business cycle measures1. Stagflation – when inflation and

unemployment rise simultaneously 2. Misery Index – a measurement that

combines unemployment and inflation

unemployment

inflation

RecessionStagflationRecoverypeaktrough

Decide if unemployment and inflation will increase or decrease or not change during

phases of the business cycle listed.

unemployment

inflation

Recession increase decreaseStagflation increase increaseRecovery decrease increasepeak No change No changetrough No change No change

Decide if unemployment and inflation will increase or decrease or not change during

phases of the business cycle listed.