Unit 2: Circular Flow, GDP, Real GDP, and Nominal GDP

Real GDP:

What is Peak?

- the highness point of GDP

- has the lowest unemployment & greatest spending

What is Expansion? 

- " Recovery Phase"

- where real GDP is increasing, which cost spending to increase and unemployment to decrease

What is Contraction/ Recession? 

- where real GDP declines for six months

- increase in unemployment and reduction in spending

What is Trough?

- the lowest point of real GDP

- it has the highest point of unemployment and highest amount of spending 

Circular Flow:

Gross Domestic Program (GDP)

What is a Circular Flow Diagram? 

- it represents the transaction in a economy

What is a Product Market?

- it is a place where goods and services are produced by business

What is a Factor Market?

- a place where households sell resources and business by resources

What is a Firm? 

 - an organization that produces goods and sales

What is a Household?

 - a person or a group of people that shares an income

What is GDP? 

- gross domestic program

- its the total market value of all final goods and services produced in a within country's border in a given year

What is GNP?

- gross national product

- the total market value of all final goods and services by citizens of that country on its land or foreign land

Gross = Total

Included in GDP:

C - personal consumption expenditures

IG - Gross private domestic investment

1. Factory
2. Factory equipment
3. Construction of Houses
4. Unsold inventory of products built in a year

G- government spending (can buy anything & everything)

Xn - Net Export (Exports - Imports)

C + IG + D + Xn ( Ex - Im)

Not Included in GDP:

1. Intermediate goods - good that requires further processing before it is ready for final use 

(ex. car parts)

2. Used of secondhand goods
     - trying to avoid double counting

3. Purely Financial Transactions 
(ex. stocks & bonds)

4. Illegal Activities 
(ex. drugs)

5. Unreported business activity 
(ex. unreported tips)

6. Non-market Activity  
(ex. volunteering, babysitting, or any work performed for yourself)

7. Transfer Payment 
- public (social security, welfare)
- private (scholarships -money transferred from donor to you)

What is Nominal GDP? 

- It's the value of the output produced in current prices

- can increase from year to year if either output or price increases.

- If we want to measure price increases known as inflation, we use nominal GDP.

What is Real GDP?

- It's the value of output produced in constant based year price.

-can increase from year to year only if output increases.

- If we want to measure economic growth, we use real GDP.

- injected for inflation

- base does not move

source: http://www.slideshare.net/mrbagzis/ch05-all-macrolectureppt

What is GDP Deflator?

- It is a price index use to adjust from nominal to real GDP.

  ( N / R x 100)

- if the base year, GDP Deflator with always = to 100

- In years after the base year, GDP is greater than 100

- In the particular year, GDP is less than 100

What is Consumer Price Index? 

- It is the most commonly use of inflation

What is Inflation Rate?

GDP Formulas

Nominal: Price x Quantity

Real: New Quantity x Base Price

Deflator: (Nominal / Real) x 100

Inflation: ((New Deflator - Old Deflator) / Old Deflator) x 100

Unemployment Rate: # of Unemployment / (# of employed + Unemployed) x 100

Expenditure : C + Ig + G + Xn

Income: W + R + I + P + statistical adjustment

Budget: (Gov. purchase of goods & services) + (Gov. transfer payment) - (Gov. Tax&Fee collection)

     + deficit, - surplus

Trade: Export - Import

     - deficit, + surplus

National Income: 1. (Compensation of Employees) + (Rental Income) + (Interest Income) + (Corporate Income) + (Properties Income)

     2. (GDP) - (Indirect Business Taxes) - (Depreciation) - (Net Foreign)

Disposable Income: (Nat. Income) - (Personal Household Taxes) + (Gov. Transfer Payment)