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CIRCULAR FLOW MODEL
• In the United States mixed economy, there are three sectors, or elements, that interact:
•households•businesses•government
• Economists use the circular flow model to explain the interaction among these three sectors. Each sector of the economy contributes to another.
Circular Flow Model• I. Circular Flow Model
– A. Household & Firms– B. Factor Market
1.Where firms purchase or rent land2.Firms hire workers & pay salaries for
labor3.Borrow money from households to
purchase capital households interest or profits in return.
C. Product Market1.Households purchase products made
by firms
Circular Flow Model• II. Mixed Economy –
A. Government in the Factor Market1. Government purchases land, labor, & capital from households2. Government collect taxes from firms.
B. Government in the Product Market1. Government purchases goods & services = building, telephones, computers, fax machines2. Government provides goods & services = roads3. Government collect taxes from households
Business Cycle
Measuring Economic Activities
Gross Domestic Product GDP
• total market value($ value) of all the goods & services produced within the borders of a nation during a specified period.
• Usually reported on an annual basis• Per Capita GDP: nations GDP divided by
its population
Gross National Product (GNP)
• total market value($ value) of all the goods & services produced from a nation during a specified period.
• It includes inside & outside of the country
Consumer Price Index (CPI)
• Calculated each month by the Bureau of Labor Statistics• Price index determined by measuring the
prices of a “market basket”• Ex. Food, housing, medical care,
entertainment
Business Cycle
•not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock.
•Its timing is random & unpredictable.
4 Phases of the Business Cycle
• A sequence of four phases.
• Expansion• Peak • Contraction• Trough
Phases of the Business Cycle
1. Expansion: speedup in the pace of economic activity & a rise in real GDP
•Recovery: right after a trough, economy is getting better
•Prosperity: right before a peak, economy is at its best•economic growth
2. Peak: upper turning of a business cycle•When GDP stops rising
Phases of the Business Cycle
• Contraction: slow down in the pace of economic activity
•Economic decline marked by falling GDP•Recession: 6 straight months of contraction
•Depression: Especially long contraction
• Trough: lower turning point of a business cycle, where a contraction turns into an expansion
•GDP stops falling
**A trough & peak both represent a turning point in the business cycle**
National Debt
• http://www.usdebtclock.org/
National Debt• the total amount of money the Federal
Government owes to bondholders.
• The debt is owed to investors who hold treasury bonds. If you invest in a treasury bond, the money that one uses to buy the bond is used to finance the National Government.
• A bond is essential an IOU issued by the government as a way for them to borrow money.
Problems of the National Debt
• Reduces the funds available for businesses to invest.
• The government must pay interest to bondholders, the more the government borrows, the more interest it has to pay.
• Roughly, to pay off the National Debt today, each citizen would have to pay just over $51,925
•When President Bush took office over 10 years ago, the national debt was at $5.6 trillion; since then, big budget surpluses have collapsed into huge deficits, & the debt has shot up more than 50 percent.
•When Obama took office it was $9.986 trillion
Business Cycle Activity• Please create the business cycle for the following items
on a separate sheet of paper…
• Ski Boots• Sun screen• Wool socks• Sandals • Summer Shorts