2.2 Circular Flow and GDP
Income Approach to GDP
calculating GDP by adding up all earnings from resources used to produce output in the nation during the year Adds up all the income earned from producing goods and services
How do you use GDP
1. Compare to previous years (Is there growth?) 2. Compare policy changes (Did a new policy work?) 3. Compare to other countries (Are we better off?)
Why do some countries have higher GDPs than others?
1. Economic System: promotes innovation and provides incentives, capitalism 2. Property Rights 3. Capital stock 4. Human Capital (Knowledge) 5. Natural Resources
Four factors of income
1. Land = Rent 2. Labor = wages 3. Capital = Interest 4. Enterprises = profit
Macro was created to:
1. measure the health of the whole economy 2. guide government policies to fix problems
All countries have three macroeconomic goals:
1. promote economic growth 2. limit unemployment 3. keep prices stable (limit inflation)
Not included in GDP
- intermediate goods and services - inputs - used goods - financial assets like stocks and bonds - foreign-produced goods and services
2014 was 4000 2019 was 5000
25%
2,100 2,000
5%
transfer payments
Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education. Welfare and social security
investment
Buy capital like machines,resources, and tools
dollar value
GDP is measured in dollars
GDP per capita
GDP divided by population Best measure of nations standard of living
Government buys what
Goods and services from business Ex: private jets And pays from government spending
GDP
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy within a country in one year Dollar value Final goods Within a country One year
Business don't take all the revenue but
Have to pay the cost which is given as income to the households
Where to resources come from
Households from the resource market Ex: working at Burger King
Does GDP accurately measure standard of living?
Needs to be adjust to reflect size of the nation's population
Business sell Goods and services to household in something called the
Product market Ex: phone is made by a business and sold to you
To make goods and services business need
Resources
Government pays for
Resources Ex: teachers and pays for them too
Consumer spending is called what in businesses
Revenue
Government provides what to government
Subsides Transfer payments
Expenditures Approach to GDP
The method that adds all expenditures made for final goods and final services to measure the GDP 1. Consumer spending, purchase of final goods 2. Business investment, spending tools and equipment 3. Government spending , schools and roads 4. Net exports
Nonmarket and illegal activities
Things made at home- household production (Ex: Unpaid work, black markets, drugs)
Government provides what to households
Welfare Transfer payments
national income accounting
a system that collects macroeconomic statistics on production, income, investment, and savings
financial transactions
any exchange of money between two or more businesses or individuals Not producing but INVESTING Used Goods
consumer spending
durable goods, non-durable goods, and services
nonmarket transactions
economic activity not taking place in the market and, therefore, not included in GDP Have value to us but doesn't count
intermediate goods
goods used in the production of final goods
What does GDP tell us?
how well the US is doing financially
leading indicators
key economic variables that economists use to predict a new phase of a business cycle
4 factors of production
land, labor, capital, entrepreneurship
government provides
public goods ex: roads and schools to business and households
Inventories
stocks of goods held to satisfy future sales
factor payments
the income people receive for supplying factors of production, such as land, labor, or capital
The private sector
the part of the economy that involves the transactions of individuals and businesses
The public sector
the part of the economy that involves the transactions of the government