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