WE ARE TALKING ABOUT ECONOMICS!!!

WE ARE TALKING ABOUT ECONOMICS!!!

ECONOMIC MODEL: CIRCULAR FLOW OF INCOME

GDP

ECONOMIC CYCLE

RECESSION (CRISIS)

ECONOMICS INDICATORS

INFLATION: CPI

INTEREST RATES

EURIBOR

THE CIRCULAR FLOW OF INCOME

Definition: The circular flow of income is a simple model of the

economy showing flows of goods and services and factors of

production between firms and households. It shows that

households provide the factors of production for firms who

produce goods and services. In return the factors of production

receive factor payments, such as wages, which in turn are spent

on the output of firms.

THE CIRCULAR FLOW OF INCOME

THE CIRCULAR FLOW OF INCOME

In reality there are three more sectors involved:

1. Financial Sector: the households do not spend all their current income. Some is saved. This

represents a leakage from the circular flow. In addition to the consumer spending, firms also

carry out investment spending.

2.Government Sector: Government spending will be injected into the circular flow and taxation

will leak from it.

3.Overseas sector: Export flows will be injected and imports flows leaked.

In terms of the five sector circular flow of income model the state of equilibrium occurs when the total leakages

are equal to the total injections that occur in the economy. This can be shown as:

Savings + Taxes + Imports = Investment + Government Spending + Exports

OR

S + T + M = I + G + X.

THE CIRCULAR FLOW OF INCOME

GDP: GROSS DOMESTIC PRODUCT

Definition: The total market value of all goods and services

produced within the political boundaries of an economy during a

given period of time, usually one year. This is the government's

official measure of how much output our economy produces.

GDP: GROSS DOMESTIC PRODUCT

ECONOMIC CYCLE

The business cycle or economic cycle refers to the fluctuations of

economic activity about its long term growth trend. The cycle

involves shifts over time between periods of relatively rapid

growth of output (recovery and prosperity), and periods of

relative stagnation or decline (contraction or recession). These

fluctuations are often measured using the real gross domestic

product.

ECONOMIC CYCLE

RECESSION

Definition: A not very well defined term that indicates a

slowdown in economic activity. A particularly long-lasting and

painful recession is known as a depression.

Recession? Depression? What's the difference?

There is an old joke among economists that states:

A recession is when your neighbor loses his job.

A depression is when you lose your job.

ECONOMIC INDICATORS

Definition: An economic indicator is simply any economic

statistic, such as the unemployment rate, GDP, or the inflation

rate, which indicate how well the economy is doing and how well

the economy is going to do in the future, investors use all the

information to make decisions. And also they show how effective

are economic policies.

ECONOMIC INDICATORS: TIMING

Definition: Economic Indicators can be leading, lagging, or

coincident which indicates the timing of their changes

relative to how the economy as a whole changes.

1. Leading: Leading economic indicators are indicators which change before the economy changes. Stock market returns

are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy

begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the

economy will be like in the future.

2. Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. The

unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts

to improve.

3. Coincident: A coincident economic indicator is one that simply moves at the same time the economy does. The Gross

Domestic Product is a coincident indicator.

INFLATION: CPI (CONSUMERS PRICE

INDEX)

Definition: Inflation is a rise in the general level of prices of goods and

services over time.

Negative effects: Decreases the purchasing power and also reduce

incentives to save.

Calculating inflation: There are many measures of inflation, because

there are many different price indices relating to different sectors of

the economy. The two most common price indices used in calculating

inflation are CPI and the GDP deflator.

INTEREST RATES

Definition: The interest rate is the price charged by a lender to a

borrower in order for the borrower to obtain a loan. This is

usually expressed as a percentage of the total amount loaned.

Interest rates, both nominal and real, have impacts on the

economy as they impact the saving, spending and investment

decisions made by households and firms.

INTEREST RATES

How Do I Calculate the Real Interest Rate?

Before we start making the calculations we need to introduce some notation:

i: is the Inflation Rate

n: is the Nominal Interest Rate

r: is the Real Interest Rate

EQUATION: r = n – i

EURIBOR

Definition: The Euro Interbank Offered Rate (or Euribor) is a

daily reference rate based on the averaged interest rates at which

banks offer to lend unsecured funds to other banks in the euro

wholesale money market (or interbank market).

EURIBOR