1. Measurement of Economic Performance
AP Macroeconomics Modules 10-15
Nancy K. Ware
Gainesville High School

2. Module 10 The Circular Flow Model & Gross Domestic Product

3. Module 10 Essential Questions
How do economists use aggregate measure to track the performance of the economy?
What is the circular flow diagram of the economy?
What is gross domestic product (GDP) and what are the 3 ways to calculate it?
Virtual Economics Videos: Economic Growth and
GDP

4. Stop, Collaborate & THINK!!
What is macroeconomics?
What is the difference between Micro and Macro?
Why should the economy be studied?
How do you measure something? Describe.
How do economists gauge what is happening in the economy?

5. Terms to Know
National Accounts: keeps track of different flows of money between the different sectors of the economy (consumer spending, business sales, business investment etc.)
National Income Accounting: method of measuring the flows of income and expenditures in the economy over a period of time
National income accounts serve the same purpose for the economy as does the income statement of a business

6. The Circular Flow Model of the Macroeconomy: Product Market Actors
Product Market: a market where goods and services and b__________and ________
Households = d__________ side of the market
Businesses = s__________ side of the market
Interaction of demand and supply: determines the p_________of each product
Flow of consumer expenditures: constitute s______ receipts for businesses

7. The Circular Flow Model of the Macroeconomy: Product Market Actors
Product Market: a market where goods and services and bought and sold
Households = demand side of the market
Businesses = supply side of the market
Interaction of demand and supply: determines the price of each product
Flow of consumer expenditures: constitute sales receipts for businesses

8. The Circular Flow Model of the Macroeconomy: Resource (Factor) Market Actors
Resource (Factor) Market: where land, labor, capital are b_________and s_______
Households = supply r___________ directly (workers ) or indirectly (through ownership of corporations)
Businesses = d___________r___________ in order to produce goods and services
Interaction of supply and demand: determine the p______ of the r_____________, which in turn is i__________ for the owner of the resource
Flow of payments from businesses for resources: constitute b____________c_______ and resources owner’s incomes

9. The Circular Flow Model of the Macroeconomy: Resource (Factor) Market Actors
Resource (Factor) Market: where land, labor, capital are bought and sold
Households = supply resources directly (workers ) or indirectly (through ownership of corporations)
Businesses = demand resources in order to produce goods and services
Interaction of supply and demand: determine the price of the resource, which in turn is income for the owner of the resource
Flow of payments from businesses for resources: constitute business costs and resources owner’s incomes

10. Drawing the (Simple) Circular Flow Model of Economic Interdependence

11. Drawing the (Simple) Circular Flow Model of Economic Interdependence

12. Expanded Circular Flow Diagram

13. Circular Flow Diagram of a Mixed Economy
monetary flow
physical flow
Households
Firms
Product market
Factor market
Government
expenditures
government-owned factors
taxes
government purchases

14. Gross Domestic Product
Final goods and services
Intermediate goods and services
GDP: Ways to Calculate
Value of Production of all final goods and services produced
Aggregate Spending Formula: C + I + G + (X-M)
Total Factor Income
Gross Domestic Product
1. Measuring GDP as the Value of Production of Final Goods and Services
Begin with the definition of GDP: The total market value of all final goods and services produced within a country in one year.
Note: The instructor can explain GDP by looking at each important piece of the definition.
Market Value: We must compute the value of production, not just the production
GDP includes only final products and services; it avoids double or multiple counting, by eliminating any intermediate goods.
Final goods are those that are ready for consumption. A bottle of ketchup at Kroger is counted.
Intermediate goods are those that require further processing before they are counted as a final good.
GDP is tabulated as the production done within the bounds of a given nation. If it was produced in America, it belongs in the GDP of America. It doesn’t matter where it is actually consumed, or where the actual company is headquartered.
Ex. General Motors, an American company, has a factory producing trucks in South Africa. The value of these trucks is counted in South Africa’s GDP.
Ex. A Honda Civic produced in Kentucky in 2009, but not sold until January 2010 is counted in 2009 production and 2009 GDP.
GDP sums the dollar value of what has been produced in the economy over the year, not what was actually sold.
Production This Year
2. Measuring GDP as Spending on Domestically Produced Final Goods and Services
GDP is divided into the categories of buyers in the market; household consumers, businesses, government, and buyers from outside of the country.
Personal Consumption Expenditures—(C)—includes durable goods, non-durable goods and services. Examples?
A pedicure = service.
A new washing machine = durable.
A head of romaine lettuce = non-durable.
An accounting firm buys a new fax machine.
a. All final purchases of machinery, equipment, and tools by businesses.
Domestic Investment—(I)
A manufacturer buys a new stamping machine.
Building a new apartment complex or a Lowe’s superstore.
b. All construction (including residential).
c. Changes in business inventory.
ii. If businesses are able to sell more than they currently produce, this entry will be a negative number.
Remember it’s about production in 2009, not consumption.
i. If total output exceeds current sales, unsold inventories build up.
b. Includes all direct purchases of resources (labor in particular).
a. Includes spending by all levels of government (federal, state and local).
Government Purchases (of consumption goods and capital goods)‚ (G)
Employment of a nuclear physicist at Los Alamos.
Purchase of a heavy duty van  from General Motors.
Examples?
b. Often goods purchased in the U.S. are produced elsewhere (Imports).
a. All spending on goods produced in the U.S. must be included in GDP, whether the purchase is made here or abroad (Exports).
Net Exports—(X - IM)
c. Therefore, net exports, (X - IM) is the difference: (exports minus imports) and can be either a positive or negative number depending on which is the larger amount.
Summary: GDP = C + Ig + G + Xn
3. Measuring GDP as Factor Income Earned from Firms in the Economy
Demonstrates how the expenditures on final products are allocated to resource suppliers.
The sum of the below entries equals national income: all income earned by American supplied resources, whether here or abroad.
Compensation of employees: (includes wages, salaries, fringe benefits, salary and supplements, and payments made on behalf of workers like social security and other health and pension plans).
Proprietors’ income: income of unincorporated businesses, sole proprietorships, partnerships, and cooperatives.
Interest: payments from private business to suppliers of money capital.
Rents: payments for supplying property resources (adjusted for depreciation it is net rent).
Corporate profits: After corporate income taxes are paid to government, dividends are distributed to the shareholders, and the remainder is left as undistributed corporate profits.
NI = Wages + Rents + Interest + Profits

15. Measurement of the Economy: Gross Domestic Product
1. Total value
of production
GDP: total market value1 of all final2 goods and services produced3 within a country4 for 1 year5
2. Not
intermediate
goods
4. Made within
the country,
even if the producer is
foreign owned
3. produced,
not SOLD
5. One (1) calendar
Year from Jan. 1
to Dec. 31

16. Components of GDP

17. 1. Measuring GDP as the Value of Production of Final Goods & Services
Computing the Market VALUE of production
Add the production versus the VALUE of the production
Example: OR
Item
January
February
Totals
# Cappuccinos 25 30 55
# Café lattes
# Scones 50 40 90
Units sold
January Item
Quantity
Prices
Value of
production
# Cappuccinos 25
$3.00
# Café lattes
$2.50
# Scones 50
$1.50
Totals
100
February Item
Quantity
Prices
Value of
production
# Cappuccinos 30
$3.00
# Café lattes
$2.50
# Scones 40
$1.50
Totals
100
In which month did the Coffee Shop have a better month?

18. 1. Measuring GDP as the Value of Production of Final Goods & Services
Computing the Market VALUE of production
Add the production versus the VALUE of the production
Example: OR
Item
January
February
Totals
# Cappuccinos 25 30 55
# Café lattes
# Scones 50 40 90
Units sold
100
200
January Item
Quantity
Prices
Value of
production
# Cappuccinos 25
$3.00
$75
# Café lattes
$2.50
$62.50
# Scones 50
$1.50
Totals
100
$212.50
February Item
Quantity
Prices
Value of
production
# Cappuccinos 30
$3.00
$90
# Café lattes
$2.50
$75
# Scones 40
$1.50
$60
Totals
$225
In which month did the Coffee Shop have a better month?

19. 1. Measuring GDP as the Value of Production of Final Goods & Services
Only Final Goods & Services are used in calculating GDP to avoid double or multiple counting (no intermediate goods)
Final Goods = ready for consumption ~ ex. Bottle of ketchup
Intermediate Goods: needs further processing before being counted as a final good
Example:
$5.00 overstates the value of the $3.00 ketchup. The $3.00 includes all the other transactions so this is the only transaction that is counted toward GDP
Transaction
Cost
1 lb of tomatoes from grower to processor
$.50
Bottle of Ketchup from processor to Kroger
$1.50
Kroger sells ketchup to consumer
$3.00
Total $ spent
$5.00

20. 1. Measuring GDP as the Value of Production of Final Goods & Services
GDP is tabulated as the production is done with the boundaries of a given nation
Produced in USA = belongs to USA’s GDP
Where it is consumed is irrelevant
Where the company is headquartered is irrelevant
Ex: General Motors, and American Company, has a factory in South Africa producing trucks. The value of the trucks are counted in whose GDP?

21. 1. Measuring GDP as the Value of Production of Final Goods & Services
GDP counts the dollar value of what has been produced in the economy over the year, not what was actually sold.
Example: A Honda Civic produced in Kentucky in 2009, but not sold until 2010 is counted in which year’s production and GDP?
USA’s production for 2009 GDP

22. 2. Measuring GDP with Aggregate Spending
GDP is divided into the buyers in the market:
household consumers,
businesses,
government,
buyers from outside the country
FORMULA: Personal Consumption + Domestic Investment + Government Purchases + Net Exports
Summary: C + I + G + (X-M)

23. Behind the GDP Formula
Personal Consumption: includes durable goods (ex._______________) and non-durable goods (ex._____________) & services (ex.___________)
Domestic Investment: final purchases in m____________, e_______________, & tools; all construction (including r_________________); & changes in business i____________y
Government Purchases: includes spending by all levels of gov’t (f_______, s_____, l_____), & all direct purchases of resources (ex. l_______)
Net Exports (X-M): all spending on goods produced in USA and sold in another country (e__________) & goods purchased in the USA but made elsewhere (i__________);
The difference (X-M) can be a p_____________ or n__________ number

24. Behind the GDP Formula
Personal Consumption: includes durable (new dishwasher) and non-durable goods (lettuce) & services (pedicure)
Domestic Investment: final purchases in machinery, equipment, & tools; all construction (including residential); & changes in business inventory
Government Purchases: includes spending by all levels of gov’t (fed, state, local). & all direct purchases of resources (labor)
Net Exports (X-M): all spending on goods produced in USA and sold in another country (exports) & goods purchased in the USA but made elsewhere (imports);
The difference (X-M) can be positive or negative number

25. 3. Measuring GDP as Factor Income Earned (from Businesses in the economy)
The sum of national income: all income supplied by American supplied resources (here or abroad)
NI = Wages + Rents + Interest + Profits
W = Compensation for employees
R = Rents
I = Interest
P = Proprietor's Income & Corporate profits
3. Measuring GDP as Factor Income Earned from Firms in the Economy
The sum of the below entries equals national income: all income earned by American supplied resources, whether here or abroad.
Demonstrates how the expenditures on final products are allocated to resource suppliers.
Compensation of employees: (includes wages, salaries, fringe benefits, salary and supplements, and payments made on behalf of workers like social security and other health and pension plans).
Rents: payments for supplying property resources (adjusted for depreciation it is net rent).
Interest: payments from private business to suppliers of money capital.
Proprietors’ income: income of unincorporated businesses, sole proprietorships, partnerships, and cooperatives.
Corporate profits: After corporate income taxes are paid to government, dividends are distributed to the shareholders, and the remainder is left as undistributed corporate profits.
NI = Wages + Rents + Interest + Profits

26. GDP What to Count or Not to Count?
COUNTED:
Domestically produced final goods and services
NOT COUNTED:
Second hand sales, resells on E-bay
Pure financial transactions (public transfer payments, social security, welfare benefits)
Private transfer payments (student allowances, alimony)
Transfer of existing assets: sale of stocks & bonds

27. Activity: USA GDP ~ Included or Not Included?
2 x 4’s that are used in building a new home
A brand new Dodge Ram Truck built in Cullman, Alabama & purchased in Canada
Fan belts used in the building of a new Honda Accord
A Honda Accord built in Ohio
Ford F150 built in Canada & imported to the USA
Samsung TVs assembled in South Korea
Delta sells an airplane to Korean Air
Ms. Ware purchases Facebook stock.
Ms. Ware buys some French perfume at Macy’s.

28. Homework  Complete Module 10 questions p. 110-111 Read Module 11
Strive for a 5 Module 10 vocab & fill in the blank