GDP Calculation and Business Cycles

1. 3 questions and Tradeoffs Circular Flow Model, Production Possibility Frontiers

2. The 3 questions People seek to answer 3 questions when producing… What do we produce? How do we produce? For whomdo we produce?

3. WHAT and How Land Labor Capital Entrepreneurship What: Goods and Services How: Factors of Production

4. WHAT? Top Services and Goods

5. For Whom? Land  rent Labor  wages Capital  interest Entrepreneurship  profit/loss FOPs are paid income. Functional distribution of income

6. Personal Distribution of Income

9. Markets Markets A market is any arrangement that brings buyers and sellers together and enables them to get information and do business with each other. Factor marketsare markets in which factors of production are bought and sold. Goods marketsare markets in which goods and services are bought and sold.

13. What are the possible decisions a firm can make?

14. PRODUCTION POSSIBILITIES Production Possibilities Frontier A curve showing the combinations between two goods that can be produced using all available resources.

15. Figure 3.1 shows the PPF for bottled water and CDs. Each point on the graph represents a column of the table. The line through the points is the PPF. PRODUCTION POSSIBILITIES

16. We can produce at any point inside the PPF or on the frontier. Points outside the PPF such as point G are unattainable. The PPF separates attainable combinations from unattainable combinations. PRODUCTION POSSIBILITIES

17. 1. When production is on the PPF, such as at point E or D, production is efficient. 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. PRODUCTION POSSIBILITIES

19. Moving from E to F, 1 bottle of water costs 5 CDs. OPPORTUNITY COST

21. How do you shift the curve? Improvements in productivity New technology Novel techniques An increase in the factors of production An increase in the workforce Rise in the amount of capital “Shift it to the right  productivity or novelty, Shift it to the left  inefficiency”

22. Draw the following situation… 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.