Measuring Macroeconomic Output Circular Flow and GDP

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

Figure 10.1 The Circular-Flow Diagram Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

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

Figure 10.2 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

Figure 10.3 Calculating GDP Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

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

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

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

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

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

Figure 10.4 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