hey dad this is Jacob Clifford and welcome to my youtube channel now let's go back in time in December of 1799 in the first American president George Washington is sick you're the doctor and given the limited access you have to medical research you prescribed bloodletting so you confidently remove five pints of his blood five pints and the results well he dies later that night bummer okay let's do this again except it's October of 1929 you're not a doctor you're an economist the stock market just crashed leading to a global economic collapse so what do you do what medicine do you prescribe what steps do you take and will they make things better or worse most people have absolutely no clue but not you you understand economics okay I promise to go back and talk about the Great Depression but first let's cover some key concepts now all the things you learned in unit 1 are covered in both a micro and a Mac record on its class but in unit 2 we're diving fully into macroeconomics the study of the overall economy and the single most important concept in all of macroeconomics is GDP gross domestic product it's the value of everything the country produces in a year GDP was developed in the early part the Great Depression as a systematic way to measure the health of the economy so going with this whole doctor and medicine analogy GDP is a vital sign of the economy it's like the heartbeat the textbook definition is that GDP is the dollar value of all final goods and services produced in the country's border in one year notice there are some details there first it's the dollar value so it's measured in dollars it's not measured in the number of chickens and cars and pizzas we can produce and it only includes final goods and services so a tomato does count if it's bought by the end consumer but if it's purchased by a business to be put into a pizza then that tomato doesn't count towards GDP that's called an intermediate good doesn't count GDP looks at production within the country and it doesn't matter who owns a company or the factory if it's produced in the United States that counts towards the US GDP and lastly it's measured each year so this allows us to see if the economy is growing over time and to see if specific policies are working now one of the things your teacher a professor is going to talk about is the three ways to measure GDP there's the expenditures approach the income approach and the value-added approach all three should give you the same exact number they're just different ways of looking at it the first one the expenditures approach looks at all the purchases made on goods and services produced United States in a given year it focuses on purchases and it turns out there's only four entities that can purchase things in the economy either consumers that's consumer spending by businesses that's investment spending by the government that's government spending and by other countries that's the idea of net exports exports minus imports and together this creates the most important equation in all of macroeconomics gep equals C plus I plus G Plus X minus M and the second way of coming up the same number is looking at all the income earned by all those purchases and that's the income approach every single person spending is somebody else's income and that should result in the same number in a macro class the income approach isn't used as much as the expenditures approach but it does have its own equation national income equals wages plus rents plus interest plus profits these represent all the different sources of income from selling all the goods and services in a given year the GDP feels like I'm doing a lot with my fingers in this episode I know a lot of lists and the third way of coming out the GDP is the value added approach which involves just adding up the value added at each stage of the production process I think all three of these will make more sense if I just give you some examples so for simplicity let's just say we're selling hats jacked I so the only thing being produced in the entire country is just one hat and it cost me three dollars to get the yarn for the hat and I sell the hat for ten dollars so if you buy the hat from me that's considered consumer spending that's part of the expenditures approach and the GDP is ten dollars notice we don't count the three dollars for the yarn because that's an intermediate good we just count the value of the final good notice that using the income approach the GDP is still ten dollars right if I earn seven dollars from selling you the hats that's seven dollars towards national income plus the three dollars earned by the guy who sold me the yarn he earned three dollars seven plus three ten dollars and the third one the value-added approach is like the same thing except in Reverse so the person that converted the raw cotton into yarn added three dollars of value to it when he sold to me for three dollars then I converted that yarn into a hat that I sold for ten dollars so it converted it adding another seven so they added three I added seven for a total of ten does that make sense now every time I teach GDP there's always some student that asked some ridiculous question like what if you're making the hats but you're crossing the border and you're in the airport but you bought the yarn from the guy from Canada but you sold it to a guy in Mexico but you sold it to on the plane but you haven't taken off yet like no don't get bogged down by all the details your teacher and professor is gonna ask you questions about does this or does this count or GDP but it's not gonna be that complicated just make sure you understand what GDP is the three ways to measure it and what things count and what things don't count towards GDP things that don't count are like intermediate goods these are things that are used to produce the final good they don't count in GDP we also don't count use goods things were produced in previous years don't count towards today's GDP financial transactions don't count towards GDP because nothing new is produced so if you buy stocks or bonds from somebody that doesn't count towards GDP and government spending counselor GDP but transfer payments don't count towards GDP point here is you have to understand what counts and what doesn't count which means that you're gonna have to do some practice so as always at the end of this video I gave you some practice multiple-choice questions to make sure you're actually getting it but before we do that we're gonna have to do this this is the circular flow model and at first glance it seems super confusing but I promise you it's not that hard it's gonna make sense see it better okay pause now if you've already seen this you understand the circular flow model then keep watching this video but if you have it pause this video go watch the other video that I made explaining the entire circular flow then come back and watch this video I'm assuming that you've seen this and if you haven't you're gonna be totally lost so make sure you understand the circular flow do you see how the circular flow model shows both the expenditures approach to GDP and the income approach to calculating GDP the expenditures approach focuses on all that spending and the income approach focuses on well the income but because I was trying to keep things simple I didn't include one of the most important parts of the economy the financial sector this shows how private savings which is savings by individual households and public savings which is savings by the government how its lent out to businesses and individuals in the government to make purchases okay now let's go back and look at the Great Depression that turns out that the bloodletting that killed George Washington was the same thing that killed the economy in the 1930 the lifeline of the economy is money if there's no money there's no savings there's no lending there's no spending and the whole economy will just shrivel up and that's exactly what happened during the Great Depression the Federal Reserve didn't stop the bleeding and the money supply decreased by 35 percent in fact years later the chairman of the Federal Reserve Ben Bernanke said regarding the Great Depression you're right we did it we're very sorry we won't do it again bummer as you know each episode I add something to the wall behind me to help you remember the key concepts so to help you remember the idea that circular flow C ing and the idea of the financial sector we have Lightning McQueen consumer spending tow mater which is business spending or investment and of course the sheriff which is government spending so right here are the three parts of a closed economy and the circular flow model by the way if you haven't already seen it I made an econ movies episode using cars the example to talk about recessions and growth and the economy and GDP you should check it out and to remind you about bloodletting and George Washington the Great Depression the whole idea the financial sector being the lifeblood the economy I have this a vial of my own blood no not really it's just some water with some food coloring what do you think I'm crazy okay now you need to practice so it's time for a pop quiz because GDP is so darn important there's two things we're gonna do to practice this video first you're gonna fill out this charts you're gonna use the words in the word bank to figure out where each one of these things are and it's going to prove that you understand the circular flow to download and print the PDF all you have to do is sign up for the free trial of my ultimate or a view packet it's right there in unit 2 and the answer key is in there as well so the link is in the description below just follow that link that's how you get this PDF and second I added some multiple-choice questions about what counts and doesn't count in GDP to the end of this video but keep in mind they won't be on the screen for very long so you have to pause the video and answer the questions then look in the comments below for the answer key as always thank you so much for watching my videos please like and subscribe good luck on these quizzes and I'm filling out the circular flow model until next time you