Chapter Two:

Useful Tools and Concepts

Our Tools for Understanding

Year Unemployment Rate Real GDP Growth Rate2000 4.0% 4.1%2001 4.7% 1.1%2002 5.8% 1.8%2003 6.0% 2.5%2004 5.5% 3.5%2005 5.1% 3.1%2006 4.6% 2.7%2007 4.6% 1.9%2008 5.8% -0.3%2009 9.3% -3.1%2010 9.6% 2.4%2011 8.9% 1.8%2012 8.1% 2.2%

Table 2.1: Unemployment Rate and Real GDP Growth Rate, United States, 2000-2012 (in percent)

Sources: U.S. Bureau of Economic Analysis, http://bea.gov/iTable/index_nipa.cfm ;U.S. Bureau of Labor Statistics, http://bls.gov/cps/cpsaat01.htm.

Figure 2.B1: Unemployment Rate, United States, 2000-2012

Sources: United States Bureau of Labor Statistics, http://bls.gov/cps/cpsaat01.htm; United States Bureau of Economic Analysis, http://bea.gov/iTable/index_nipa.cfm.

2008 (5.8, -0.3)

Figure 2.B2: Relationship between Unemployment and GDP Growth Rate, United States, 2000-2012

Sources: United States Bureau of Labor Statistics,http://bls.gov/cps/cpsaat01.htm; United States Bureau of Economic Analysis, http://bea.gov/iTable/index_nipa.cfm.

Figure 2.B3: Relationship between GDP Growth Rate and Greenhouse Gas Emissions Growth Rate,

United States, 1990-2012

Source: Greenhouse Gas data from United States Environmental Protection Agency, http://www.epa.gov/ climatechange/ghgemissions/usinventoryreport.html.

Economic Tradeoffs

A

Quantity of Butter

Qua

ntit y

of G

u ns

B

C

D PPF

Figure 2.1: Society’s Production-Possibilities Frontier

Quantity of Output 1

Qua

ntit y

of O

u tp u

t 2 PPF with Additional Resources or Technological Progress

Original PPF

Figure 2.2: An Expanded Production-Possibilities Frontier

A

Quantity of Resource-Depleting Production

Qua

ntit y

of M

a in t

ena n

c e

B

Figure 2.3: Society’s Production/Maintenance Frontier

Quantity of Output 1

Qua

ntit y

of O

u tp u

t 2 Future PPF with High Resource Maintenance Now

Future PPF with High Resource Depletion Now

Figure 2.4: Possible Future PPFs

The Role of Markets

Factor Markets

Product Markets

Land, Labor, and Capital Services

Produced Goods and Services

Wages, Rents,Interest, and Profits

Payments forProduced Goods

and Services

Households Firms

Figure 2.5: The Circular Flow Diagram for the Basic Neoclassical Model