Circular Flow of the Economy and GDP - Summary and Review

What is another name for (X - M)?

Net exports

What are final goods and services?

Goods and services sold to the end user.

Why is it important to have an accurate measure of GDP?

An accurate measure of GDP allows policy makers, economists, and others to better evaluate policies and address crises.

Why is GDP the appropriate measure of economic activity?

By measuring the quantity of goods and services multiplied by their value or price, GDP encapsulates all the value created by an entire economy.

What is included in the expanded circular-flow diagram?

Government

What are payments the government makes to individuals without expecting a good or service in return?

Government transfers

What expenditure forms the largest percentage of GDP?

Consumption (C)

Why might it be important to control for population differences when comparing GDP across countries?

Countries with large populations may seem to be more productive when, in fact, they are simply more populous. Some countries with small populations still have high productivity per person, and this is captured by per capita GDP.

List everything included in GDP.

Domestically produced final goods and services & Capital goods & New construction of structures & Changes to inventories

On the circular-flow diagram, in what markets do households offer factors of production in exchange for income?

Factor markets

What equation represents the expenditure approach?

GDP = C + I + G + (X - M)

What is GDP per capita?

GDP divided by population, or economic output per person.

What are intermediate goods and services?

Goods and services sold from firm to firm as inputs.

Why is real GDP a better measure of aggregate output than nominal GDP?

If prices have risen independently, nominal GDP will overestimate aggregate output. By controlling for price changes, real GDP can give a truer measure of the change in output from year to year or across different countries.

What is not included in GDP?

Intermediate goods and services & Inputs Used goods & Financial assets such as stocks and bonds & Foreign-produced goods and services

What form of GDP includes the effects of price changes and is measured in current prices?

Nominal GDP

On the circular-flow diagram, in what markets do households exchange money for firms' goods and services?

Product markets

What are required payments to the government called?

Taxes

What is the most common way to measure GDP?

The expenditure approach

What does the circular-flow diagram illustrate, and what does it include?

The flows of money, factors of production, and goods and services moving between households and firms in an economy.

What is government spending?

The government's expenditures on goods and services.

What is real GDP?

The value of final goods and services produced in an economy during a given year, calculated relative to a selected base year to remove the effects of overall price changes.