1. Module 10: The Circular Flow and Gross Domestic Product
AP Economics
Mr. Bernstein
Module 10: The Circular Flow and Gross Domestic Product
January 22, 2015

2. AP Economics Mr. Bernstein
The National Accounts
Produced by Department of Commerce
Income and Product Accounts
Measures flows and expenditures of a country
Equivalent of Income Statement for Corporation

3. AP Economics Mr. Bernstein
Circular Flow Diagram

4. AP Economics Mr. Bernstein
Circular Flow Diagram
Households and Firms
Product Market is the market for goods and services
Factor Markets are the markets for resources or inputs firms need to produce goods and services
Each has its own supply and demand

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Expanded Circular Flow Diagram

6. AP Economics Mr. Bernstein
Expanded Circular Flow Diagram
More complex
Households do not directly many sell factors of production to firms (other than labor) – financial markets intermediate
US government, other countries also included
Notice inflows = outflows for all markets or elements

7. AP Economics Mr. Bernstein
Gross Domestic Product: Calc Method 1
The total market value of all final goods and services produced within a country in one year
Market value – the value of production
Final goods – no intermediate goods
What if product is assembled in China, but the components came from Vietnam and the corporate headquarters is in California?

8. AP Economics Mr. Bernstein
Gross Domestic Product: Calc Method 2
Spending on Domestically Produced Final Goods and Services
Divided into four categories of buyers
Personal Consumption Expenditures (C)
Domestic Investment (I)
Government Purchases (G)
Net Exports (Xn)…aka (X – IM)
GDP = C + Ig + G + Xn

9. AP Economics Mr. Bernstein
Gross Domestic Product: Calc Method 3
Total Factor Income (National Income)
Divided into five categories of income
Compensation of all Employees, home or abroad
Rents
Interest Earned
Proprietors’ Income
Corporate Profit (undistributed)
NI = Wages + Rents + Interest + Profits

10. AP Economics Mr. Bernstein

11. AP Economics Mr. Bernstein