2.1 Circular Flow Model & GDP Flashcards
The Product Market
the “place” where goods & services produced by businesses are sold to households
The Resource (Factor) Market
the “place” where resources ( land, labor, capital, entrepreneurship) are sold to businesses
What does the resource market give to businesses
Resources
What do businesses give to the Product Market
Goods & Services
What does the Product Market give to Individuals ?
Goods & Services
What do Individuals give to the Resources Market?
Resources
What does the Resource Market give to Individuals
Income
What do Individuals give to the Product Market?
Money/Spending
What does the Product Market give to Businesses?
Revenue
What do Businesses give to the Resource Market?
Money/ Costs
What do Gov. get from individuals & businesses
Taxes
What do Gov. give individuals?
Welfare & Public Goods
What does Gov. give to businesses?
Subsides & Public Goods
Private Sector
Part of the economy that is ran by individuals & businesses
Public Sector
Part of the economy that is controlled by the gov.
Factor Payment
Payment of factors of production, namely rent, wages, interest, & profit
Transfer Payment
When the gov. redistributes income ( welfare, social security)
Subsides
Gov. payment to businesses
What are the 3 Macro goals all Countries have ?
- Promote Economic Growth
- Limit Unemployment
- Keep Prices Stable ( Limit Inflation)
Gross Domestic Product (GDP)
The dollar value of all final good & services produced within a country in one year
Dollar Value
GDP measures in dollars
Final Good
GDP only counts NEW goods & services
How is GDP used?
1.Compare to previous yesrs( is there growth?)
- Compare policy changes (Did a new policy work)
- Compare to other countries ( Are we better off?)
% Change in GDP = Year 2- Year 1/ Year 1 x 100
GDP Per Capita ( per person)
GDP divided by the population. It identifies in average how many products each person makes
It is the best measure of a nation’s standard of living
Economic System
Capitalism promotes innovation & provides incentives to improve productivity
Reason some countries have higher GDP
Rule of Law
Countries w/ solid institutions & political stability have historically had more economic growth
Reason Higher GDP Countries
Capital Stock
Countries that have more machines & tools are more productive
Reason Higher GDP Countries
Human Capital
Countries that have better education & training are more productive
Reason Higher GDP Countries
Natural Resources
Countries that have access to more natural resources are more productive
Reason Higher GDP Countries
Intermediate Goods
Goods inside final goods don’t count towards GDP
Nonproduction Transaction
Financial Transaction ( nothing produced)
- stocks, bonds
Used Goods
-used car & clothes
Non-Market & Illegal Activities
Things made at home - household production.
Ex: taking care of your kids
Black Market- Unpaid Labor, Black Market
Expenditure Approach
Add up all the spending on final goods & services produced in a given year
C + G + I + Xn
Calculate GDP
Income Approach
Add up all the income earned from selling all final goods & services produced in a given year
Labor + Rental + Interest + Profit
Calculate GDP
Value- Added Approach
Add up the dollar value added at each stage of the production process
Calculate GDP
Labor Income
Wages earned from performing work
Rental Income
Income earned from property owned by individuals
Interest Income
Interest earned from loaning money to businesses
Profit
Money businesses have after paying all their costs
Consumer Spending
Purchase of final goods & services by individuals
Businesses Investments
Business spending on tools & equipment
Gov. Spending
Ex: Schools , Tanks
Not Transferable Payments
Net Export
Export(x) - Import(m)
3 Components of Consumer Spending
- Durable Goods: refrigerator & washing machines
- Non-Durable Good: food & clothes
- Services: dental work & tutoring
What does investment mean in GDP?
When Businesses buy capital like machines, resources & tools
What is Gov. Spending
Gov. Payments for goods & services not transfer payment like welfare & social security
What does the financial sector give to businesses?
Private Borrowing
What does financial sector give to the government?
Public Borrowing
What does gov. give to the financial sector?
Public Savings
