1. 2 Methods and 4 Categories of GDP
Circular Flow and GDP
2 Methods and 4 Categories of GDP

2. Basic Principles of Circular Flow
Circular flow model is MACRO picture of economy
National accounts indicate levels of economic development (flow of money)
One principle that applies to BOTH – Flow of money into each sector is equal to flow of money out of that sector
This also applies to the EXPANDED circular flow model.
Complete expanded circular flow model before moving on…

3. Gross Domestic Product – Final Goods & Services
The total market value of all final goods and services produced within a country in one year
Only includes final goods & services (direct to consumer), not intermediate (producer-to-producer sales)
Avoids counting values two or more times
Production done within the bounds of any given nation
GDP sums the dollar value of what has been produced in the economy over the year, not what was actually sold
Market value: more than just amount of production, but value of production…ex. Bangladesh making 500,000 pieces of clothing vs. US making 100,000 electronics (Bangladesh has a higher production, but the US has a higher production value)
Final Goods vs. Intermediate goods
Final goods: ready for consumption (ketchup)
Intermediate goods: require further processing before they are counted as a final good
Only count final transaction price! This way you avoid double counting.
Within a nation:
Ex. General Motors, an American company, has a factory producing trucks in South Africa. The value of these trucks is counted to which countries GDP? South Africa
Within a year
Ex. A Honda Civic produced in Kentucky in 2009, but not sold until January 2010 is counted in 2009 production and 2009 GDP.

4. Gross Domestic Product – Four Categories
GDP = C + I + G + X – IM
(C) —Consumer Spending
(I) —Investment Spending
(G) —Government Purchases of goods and services
(X-IM) —Net Exports (sales on exports – spending on imports*)
*Imports are “leakage,” money that exits circular flow

5. Gross Domestic Product: What’s Included/Excluded?
Investment spending by businesses (capital) and changes to inventory
Domestically produced final goods & services
A note about inventory – Once released for sale, it is subtracted from GDP.
Excluded
Intermediate goods & inputs that are used up in production
Used goods
Financial Assets (Stocks & bonds)
Imports
Government transfers
Nonmarket transactions
Investment spending is on productive physical capital, the construction of structures (residential as well as commercial), changes to inventories.
Confused between inputs and final goods? Recall the distinction between resources that are used up and those that are not used up in production. An input, like steel, is used up in production. A metal-stamping machine, an investment good, is not. It will last for many years and will be used repeatedly to make many cars.
Additional inventory is an investment in future sales…when a good is released for sale from inventories, its value is subtracted from the value of inventories and so from GDP.
Financial assets, such as stocks and bonds are not included in GDO because they do not represent either the production or the sale of final goods and services. Rather, a bond represents a promise to repay with interest, and a stock represents a proof of ownership.

6. What was the USA GDP in 2014?
$17.4 trillion!!!!!!!