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What you should learn today: • Define recession • Be able to express the entire GDP equation, and what each component stands for • Identify a final good • Identify an intermediate good • Identify inflation World Debt as of Dec 2, 2015 DECEMBER 2, 2015 How U.S.Government Gets & Receives Money Circular Flow of Money EXPANSION AND CONTRACTION: THE BUSINESS CYCLE A recession is a recurring period of decline in total output, income, employment, trade, Usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy. Expansions can range in duration from several months to several years. THE U.S. RECESSIONS SINCE 1981 Length of Recessions in the U.S. since 1981 20 18 16 14 12 10 8 6 4 2 0 7/81-11/82 7/90-3/91 3/01-11/01 12/07-6/09 Double Dip Recession Recession + recovery + recession Slowdown in demand for goods & service Layoffs & spending cutbacks 9.7 9.6 2010 9 2009 6 2008 2007 4.7 2006 5.4 2005 5.8 2004 6.1 2003 4.5 2002 4.9 2001 4.2 2000 1999 4 1998 5.3 1997 5.6 1996 5.6 1995 6.2 1994 6.8 1993 7.5 1992 7 1991 1990 5.5 1989 5 1988 6 1987 7.2 1986 7.6 1985 7 1984 1983 1982 1981 10 9.3 9.6 8 7.5 6.9 5.5 5.8 5.1 4.6 4.6 4 3 2 1 0 GROSS DOMESTIC PRODUCT • The market value of all final goods & services produced within a country in a given period of time GROSS DOMESTIC PRODUCT GDP = C + G + I + NX C - Consumption G – Government Spending I – Investments NX – Net Exports = exports - imports Consumption - Durable goods • (jewelry, laptop, baseball glove) - Nondurable goods • (food, gasoline, clothing) - Services • (medical expenses, mechanic, landscaper) Government Spending - Defense - Postal Service - Roads - Schools - Doesn’t include social security or unemployment benefits Investments • Residential • Single-family homes • Multi-family homes • Rental Property • Non-Residential • Equipment (machines and tools) • Business Plants • Business Inventories Net Exports • Exports – Imports = NX • Ship $128,000 worth of corn to Columbia • Receive $115,000 worth of coffee beans from Columbia • Net Exports? Transfer Payments $54 Interest Income $150 Depreciation $36 Wages $67 Gross Private Investment $124 Business Profits $200 Indirect Business Taxes $74 Rental Income $75 Exports Net Foreign Factor Income Government Purchases Household Consumption Imports GDP • • • • • Gross Private Investment$124 Government Purchases$156 Household Consumption$304 Exports- $118 Imports- $95 $118 $12 124+156+304+(118-95)=? $156 $304 $95 GDP=$606 GROSS DOMESTIC PRODUCT Final Goods •Intended for the end user Intermediate Goods •Components of ingredients in the production of other goods Tangible goods •DVDs, mountain bikes, soda Intangible goods •Dry cleaning, concerts, cell phone service FINAL V. INTERMEDIATE GOODS Final Goods and Services Manicures Bread Cruise missile New factory Dresses Increase in automobile inventory Intermediate Goods Window glass in new automobiles Lumber in a new house Screws used in a cruise missile Flour for making bread Cloth for making dresses GDP GOODS & SERVICES AT FINAL DESTINATION Who buys haircuts, bread & dresses? Who buys cruise missiles? Who buys a new factory or builds up an inventory of unsold products such as automobiles? Households, Government Businesses families, individuals UNITED STATES GDP BY SECTOR UNITED STATES TOP TRADING PARTNERS ARUBA TRADING PARTNERS