Answer & Explanation:Please read these two power point files Then write a paragraph to answer this question: Thinking on how the PPF works and what it represents. Answer to the following question:Explain what a war or a natural disaster such as a hurricane or a earthquake will do to the PPF of a country?
krugman_mods_3e_lecture_mod10.ppt
krugman_mods_3e_lecture_mod02.ppt
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Macroeconomics in Modules
and
Economics in Modules
Third Edition
Krugman/Wells
MODULE 10 (46)
The Circular Flow
What You Will Learn
1
2
How economists use aggregate measures
to track the performance of the
economy
How the circular-flow diagram of the
economy helps with an understanding
of the national accounts
2
The National Accounts
• Almost all countries calculate a set of numbers known as
the national income and product accounts.
• The national income and product accounts, or national
accounts, keep track of the flows of money between
different parts of the economy.
3
The Simple Circular-Flow Diagram
• The simplest circular-flow diagram illustrates an economy
that contains only two inhabitants: households and firms.
• A household consists of either an individual or group of
people who share their income.
• A firm is an organization that produces goods and
services for sale—and that employs members of
households.
4
The Circular-Flow Diagram
5
The National Accounts
• Product markets are where goods and
services are bought and sold.
• Factor markets are where resources,
especially capital and labor, are bought and
sold.
• Consumer spending is household spending on
goods and services.
6
The National Accounts
• A stock is a share in the ownership of a
company held by a shareholder.
• A bond is a loan in the form of an IOU that
pays interest.
7
An Expanded Circular-Flow Diagram
8
The National Accounts
• Households engage in consumer spending.
• Households own factors of production. They sell these
factors to firms, receiving rent, wages, interest on bonds,
dividends on stocks.
• In addition, households receive government transfers
from the government.
• Disposable income, total household income minus taxes,
is available to spend on consumption or to save.
9
The National Accounts
• Private savings, equal to disposable income minus
consumer spending, is disposable income that is not spent
on consumption.
• The banking, stock, and bond markets, which channel
private savings and foreign lending into investment
spending, government borrowing, and foreign borrowing,
are known as the financial markets.
10
The National Accounts
• Government purchases of goods and services (G) is paid
for by tax receipts as well as by government borrowing.
• Exports (X) generate an inflow of funds into the country
from the rest of the world, while imports (IM) lead to an
outflow of funds to the rest of the world.
11
The National Accounts
• Inventories are stocks of goods and raw materials held to
facilitate business operations.
• Investment spending is spending on productive physical
capital, such as machinery and construction of structures,
and on changes to inventories.
12
Economics in Action
• Government officials found it difficult to
respond to the Great Depression because of a
lack of information on the economy.
• The Department of Commerce commissioned
Simon Kuznets, a young Russian-born
economist, to develop a set of national income
accounts.
• Initial estimates fell short because they
focused on income, not production, therefore
GDP began being estimated in 1942.
13
Summary
1. Economists keep track of the flows of money between
sectors with the national income and product
accounts, or national accounts.
2. Households earn income via the factor markets from
wages.
3. Disposable income is allocated to consumer spending
(C) and private savings.
4. Via the financial markets, private savings and foreign
lending are channeled to investment spending (I),
government borrowing, and foreign borrowing.
5. Government purchases of goods and services (G) are
paid for by tax revenues and any government
borrowing.
14
Summary
6. Exports (X) generate an inflow of funds into the
country from the rest of the world, but imports (IM)
lead to an outflow of funds to the rest of the world.
15
Macroeconomics in Modules
Third Edition
Krugman/Wells
MODULE 2
The Production Possibility Frontier Model
Krugman/Wells
What You Will Learn
1
2
3
The importance of trade-offs in economic analysis
When the production possibilities curve model tells
us about efficiency, opportunity cost, and
economic growth
The two sources of economic growth—increases in
the availability of resources and improvements in
technology
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Trade-offs:
The Production Possibility Frontier
• Someone makes a trade-off when they give up something
to get something else.
• The production possibility frontier (PPF)
– Illustrates the trade-offs facing an economy that
produces only two goods.
– Shows the maximum quantity of one good that
can be produced for any given production of the
other.
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The Production Possibility Frontier
4
Efficiency
• The PPF illustrates efficiency.
– An economy is efficient if there is no way to make
anyone better off without making at least one
person worse off.
– An economy is efficient in production if it
produces at a point on its PPF.
– An economy is efficient in allocation if it allocates
its resources so that consumers are as well off as
possible.
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Opportunity Cost
• The PPF is a reminder that the true cost of any good is
everything, in addition to money, that must be given up to
get that good – the opportunity cost.
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Increasing Opportunity Cost
7
Economic Growth
• Economic growth allows a sustained rise in aggregate
output.
– Economic growth is shown as an outward shift of
the PPF.
• There are two general sources of economic growth.
– An increase in an economy’s resources.
– Progress in technology.
8 of 11
Economic Growth
9 of 11
Summary
1. One important economic model is the production
possibility frontier.
2. The PPF illustrates: opportunity cost, efficiency, and
economic growth.
3. There are two basic sources of growth: an increase in
factors of production, and improved technology.
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