1. Measuring Macroeconomic Output
Circular Flow and GDP

2. Circular Flow Model
A simplified model of the macro economy that illustrates flows of money, goods and services At each “node” of the model, money going out = money going in

3. Figure The Circular-Flow Diagram Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

4. Gross Domestic Product (GDP)
A macroeconomic measure of output
The value of all final goods and services produced in a country in a given year
Three methods of calculating
Value-added approach
Expenditure approach
Income approach

5. Figure An Expanded Circular - Flow Diagram: How Money Flows Through the Economy Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

6. Figure Calculating GDP Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

7. Expenditure Approach GDP = C + G + I + NX C = Consumer spending
G = Government spending
I = Investment spending
NX = Net exports = (Exports – Imports)

8. Consumer Spending
Money spent by households on final goods and services
DOES NOT include
Taxes paid to governments
Money invested or saved in financial institutions
Money spent outside the country

9. Government Spending
Money spent by governments (at all levels) on final goods and services
DOES NOT include “transfer payments”
Social security
Unemployment
Business subsidies

10. Investment Spending
Money spent by businesses on final goods and services (productive physical capital)
Does NOT include intermediate goods or inputs used in production
DOES include
Increase in inventories
New homes

11. Net Exports Exports Imports
The value of final goods and services produced in the country and sold overseas
Imports
The value of final goods and services produced overseas and sold in the country

12. Figure U.S. GDP in 2009: Two Methods of Calculating GDP Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers