The Business Cycle & Aggregate Demand/Supply
Chapter 7
The Circular Flow Model Revisited Factors of production:
· Land – rent
· Labor – wages
· Capital – interest
· Entrepreneurship – profit The important principle:
In any given time period, the value of output produced by an economy is equal to the total income that is generated in producing the output, which is equal to the expenditures made to purchase that output
Value of output produced = total income generated = expenditure made to purchase Leakages | Injections | Saving | Investment | Taxes | Government Spending | Imports | Exports | Saving -> Financial Markets -> Investment
Taxes -> Government -> Government spending
Spending on imports -> Other countries -> Spending on exports
National Income Accounting
Formal definition for GDP:
The market value of all final goods and services produced within a country during a given time period Expenditure Method:
C + I + G + (X-M) = GDP Income Method:
Rent + Wages + Interest + Profit Output Method:
Adding up the value of all final goods and services (to avoid double counting!)
Key Distinctions
Gross investment = net investment + depreciation Nominal – value measured in terms of current prices
Nominal GDP – measures the value of current output valued at current prices
Real – value that takes into account changes in prices over time
Real GDP – measures the value of current output valued at constant (base year) prices Per capita – per person or per head GDP – produced within the boundaries of a country
Ex. Toyota plant in US is part of US’s GDP
GNP – produced by the factors of production supplied by the residents of a country
Ex. Toyota plant in US is part of Japan’s GNP
Economic Growth and Development
Economic growth – a percentage change in real GDP over a specific period of time
% change in real GDP = [(final value – initial value) / initial value] * 100 Sources of economic growth: * Short run: limited growth
The Circular Flow Model Revisited Factors of production:
· Land – rent
· Labor – wages
· Capital – interest
· Entrepreneurship – profit The important principle:
In any given time period, the value of output produced by an economy is equal to the total income that is generated in producing the output, which is equal to the expenditures made to purchase that output
Value of output produced = total income generated = expenditure made to purchase Leakages | Injections | Saving | Investment | Taxes | Government Spending | Imports | Exports | Saving -> Financial Markets -> Investment
Taxes -> Government -> Government spending
Spending on imports -> Other countries -> Spending on exports
National Income Accounting
Formal definition for GDP:
The market value of all final goods and services produced within a country during a given time period Expenditure Method:
C + I + G + (X-M) = GDP Income Method:
Rent + Wages + Interest + Profit Output Method:
Adding up the value of all final goods and services (to avoid double counting!)
Key Distinctions
Gross investment = net investment + depreciation Nominal – value measured in terms of current prices
Nominal GDP – measures the value of current output valued at current prices
Real – value that takes into account changes in prices over time
Real GDP – measures the value of current output valued at constant (base year) prices Per capita – per person or per head GDP – produced within the boundaries of a country
Ex. Toyota plant in US is part of US’s GDP
GNP – produced by the factors of production supplied by the residents of a country
Ex. Toyota plant in US is part of Japan’s GNP
Economic Growth and Development
Economic growth – a percentage change in real GDP over a specific period of time
% change in real GDP = [(final value – initial value) / initial value] * 100 Sources of economic growth: * Short run: limited growth