How do we measure economic growth?


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GDP Calculation and Business Cycles

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How do we measure economic growth?

  1. 1. 3 questions and Tradeoffs<br />Circular Flow Model, Production Possibility Frontiers <br />
  2. 2. The 3 questions<br />People seek to answer 3 questions when producing…<br />What do we produce?<br />How do we produce?<br />For whomdo we produce?<br />
  3. 3. WHAT and How<br />Land<br />Labor<br />Capital<br />Entrepreneurship<br />What: Goods and Services<br />How: Factors of Production<br />
  4. 4. WHAT? Top Services and Goods<br />
  5. 5. For Whom?<br />Land  rent <br />Labor  wages<br />Capital  interest<br />Entrepreneurship  profit/loss<br />FOPs are paid income.<br />Functional distribution of income<br />
  6. 6. Personal Distribution of Income<br />
  7. 7. The Circular Flow Model<br />A model of the economy that shows:<br /><ul><li>the circular flow of expenditures and incomes that result from decision makers’ choices and
  8. 8. the way those choices interact in markets to determine what, how, and for whom goods and services are produced.</li></li></ul><li>Households and Firms<br />Households<br />Individuals or people living together as decision-making units.<br />Firms<br />Institutions that organize production of goods and services.<br />
  9. 9. Markets<br />Markets<br />A market is any arrangement that brings buyers and sellers together and enables them to get information and do business with each other.<br />Factor marketsare markets in which factors of production are bought and sold.<br />Goods marketsare markets in which goods and services are bought and sold.<br />
  10. 10. Real Flows<br />In factor markets:<br /><ul><li>Households supply factors of production
  11. 11. Firms hire factors of production.</li></ul>In goods markets:<br /><ul><li>Firms supply goods and services produced.
  12. 12. Households buy goods and services.</li></li></ul><li>Money FLOWS<br /><ul><li>Money Flows</li></ul>Firms pay households incomes for the services of factors of production.<br /><ul><li>Households pay firms for the goods and services they buy.</li></li></ul><li>
  13. 13. What are the possible decisions a firm can make?<br />
  14. 14. PRODUCTION POSSIBILITIES<br />Production Possibilities Frontier<br />A curve showing the combinations between two goods that can be produced using all available resources.<br />
  15. 15. Figure 3.1 shows the<br />PPF for bottled water and CDs. <br />Each point on the graph represents a column of the table.<br />The line through the points is the PPF. <br />PRODUCTION POSSIBILITIES<br />
  16. 16. We can produce at any point inside the PPF or on the frontier.<br />Points outside the PPF such as point G are unattainable.<br />The PPF separates attainable combinations from unattainable combinations.<br />PRODUCTION POSSIBILITIES<br />
  17. 17. 1. When production is on the PPF, such as at point E or D, production is efficient. <br />2.If production were inside the PPF, such as at point H, more could be produced of both goods without forgoing either good. Production is inefficient.<br />PRODUCTION POSSIBILITIES<br />
  18. 18.
  19. 19. Moving from E to F, 1 bottle of water costs 5 CDs.<br />OPPORTUNITY COST<br />
  20. 20.
  21. 21. How do you shift the curve?<br />Improvements in productivity<br />New technology<br />Novel techniques<br />An increase in the factors of production<br />An increase in the workforce<br />Rise in the amount of capital<br />“Shift it to the right  productivity or novelty,<br />Shift it to the left  inefficiency”<br />
  22. 22. Draw the following situation…<br />Costa Rica can produce bananas and coffee. During the last month, the country has made technological advances that led to a new, efficient method of planting crops. Draw and explain the impact of this advancement on both bananas and coffees.<br />