Circular flow diagram and GDP Flashcards
What does GDP stand for
Gross domestic product
What is GDP
the dollar value of ALL FINAL goods and services produced in a country in one year
What is GDP measured in
dollars
What does GDP exclude
inputs only final products/services
What are the 3 ways to measure GDP
- expenditure approach (most important one)
- income approach
- value added approach
All of them will give the same answer
Explain the expenditure appoarch
looks at all the purchases made on goods and services in a year
What is included in the expenditure approach to calculating GDP
- consumer spending (consumers)
- Businesses - investment spending
- Gov. - government spending
- other countries - exports less imports = Net exports
What is the formula using the expenditure approach to calculate GDP
GDP = C + I + G + (x-m)
Explain the income Approach to calculate GDP
- all the income earned by all the purchases
everyone’s spending is someone’s income
What is included in the income apporach
- wages
- rent
- interest
- profit
What is the formula for the income approach
wages + rent + interest + profit
What is the value added approach
adding up the value added at each stage of the production process
ex. selling hats (only thing produced int he country)
Cost = $3 for year
sells for $10
how do you calculate this using the consumer spending approach
consumer spending is $10
GDP = $10 (value of final good)
ex. selling hats (only thing produced int he country)
Cost = $3 for year
sells for $10
how do you calculate this using the income approach GDP
$7 profit toward national income
$3 profit buy the guy who sold you the yarn
—–
$10 GDP
ex. selling hats (only thing produced int he country)
Cost = $3 for year
sells for $10
how do you calculate this using the value added approach
person who converted the raw cotton into yarn added $3 of value to it when he sold it for $3
Person who converted into a hat and sold it for $10 he put $7 value added into it
$3 plus $7 = $10 GDP
What are the things that don’t count in GDP
- intermediate goods
- used goods
- financial transactions
- Gov transfer payments
Explain why intermediate goods don’t count in GDP
used to produce final good
Explain why used goods don’t count in GDP
things were produced in pervious years
Explain why financial transactions don’t count in GDP
nothing new is produced (stocks or bonds)
Explain why gov transfer payments don’t count in GDP
add
What is the product market (in circular flow diagram) include
Businesses and households
Explain the product market
businesses sell goods and services to households in the Product market
Where is a product market
anywhere you can buy stuff
What is the Resource Market (in circular flow diagram) include
Businesess and households
What is the Resource Market
businesses need resources like workers and machines
What are the 4 categories of resources
- land - natural resources
- labour
- capital - tools and machines
- entrepreneurship
If you sell land you
earn rent
if you sell labour you
earn wages
For capital you get
gets interest
Entrepreneurship you get
profit
is your local mall a product market or a resource market
Both:
Product market - buy things, profit
Resource market - working, earning wages
do businesses demand or supply
BOTH
Demand - in resource market
Supply - in product market
Explain the government’s role in the circular flow diagram
buys goods and services form businesses in the product market (ie fire trucks )
they pay for them (gov. spending)
They also buy resources form resource market like teachers and firefighters
What are transfer payments
public goods to households and businesses
Subsidies: to businesses
welfare to households
Explain taxes in the circular flow diagram
this is how the gov. receives their money
from businesses and households
Which approaches to calculating GDP are seen on the circular flow diagram
income approach and the expenditure approach
Financial sector of the circular flow diagram: explain private savings
savings by individual households
Financial sector of the circular flow diagram: explain public savings
savings by the gov. how its lent to businesses and individuals in th gov. to make purchases
No $ (great depression)
no savings
no lending
no spending
= economy will shrivel up
Wha tis the closed economy include
Consumer spending
business spending or investment
Gov. spending
C I G
Every economy has 3 economic goals , what are they
- Economic Growth
- Limit unemployment
- keep prices stable
What is the most important measurement
GDP
What are the limits of GDP
Its not the best way to measure standard of living
Why is GDP not the best way to measure the standard of living
its hard to gauge a family’s standard of living by calculating the # of pies they can produce
depends on how many people are in the the family, the size of each lice and the quality and taste of the pie
What are the limitations:
PIES
P - population
I - Inequality
E - environment
S - Shadow economy
Explain Population as it relates to the limits of GDP and what is the fix
some countries are bigger and have to disperse the GDP over more people
Fix: calculate GDP per capita
Explain Inequality as it relates to the limits of GDP and what is the fix
all households in the country do not have the same standard of living
Depends on how income is distributed
Explain Environment as it relates to the limits of GDP and what is the fix
no way to calculate the benefits of clean air, clean water or pollution form production (subjective, hard to value)
Explain Shadow Economy as it relates to the limits of GDP and what is the fix
you buy a pie from a store, that counts toward GDP
If you buy it from a friend, it does not count toward GDP
Doesn’t include volunteer work or household production or illegal transactions
How do we deal with GDP limitations
- some suggested using different ways to calcualte such as the happiness index or the GPI (genune progress indicator)
- this can still be subjective and hard to calculate
