2.1 The Circular Flow and Gross Domestic Product (GDP)

• Firms pay wages, rent, interest, and profits to households.


  True
• Money flows from households to firms for goods and services, and from firms to households for factors of production
• What is the role of firms in the circular flow model?

  Produce goods and services
• What type of income do households receive from firms for providing labor?

  Wages
• In the factor market, households sell factors of production to firms
• What flows through the product market in the circular flow model?

  Goods and services
• Factors of production include labor, capital, land, and entrepreneurship
• Firms pay wages, rent, interest, and profits to households
• Households sell factors of production in the factor market.
• Firms sell goods and services to households in the product market.
• Steps in the circular flow model

  1️⃣ Firms produce goods and services

  2️⃣ Firms sell goods and services to households

  3️⃣ Households pay firms for goods and services

  4️⃣ Households provide factors of production to firms

  5️⃣ Firms pay households for factors of production
• GDP measures the total income earned by a country's residents, regardless of where it was produced.

  False
• Firms pay households wages and rent in the factor market.
• Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country in a given period of time, usually a year
• GDP is different from Gross National Product (GNP), which measures the total income earned by a country's residents
• In the income approach, interest refers to returns on capital
• Match the GDP component with an example:

  Consumer Spending ↔️ Groceries

  Investment ↔️ New machinery

  Government Spending ↔️ Public education

  Net Exports ↔️ Exports of electronics
• Nominal GDP reflects economic growth, while real GDP tracks spending.

  False
• Match the GDP measure with its advantage:

  Nominal GDP ↔️ Reflects current economic activity

  Real GDP ↔️ Removes the effect of inflation
• Match the component with its description:

  Households ↔️ Provide factors, consume goods

  Firms ↔️ Produce goods using factors

  Factor Market ↔️ Exchanges factors for income

  Product Market ↔️ Sells goods for spending
• Firms purchase factors of production from households in the factor market.
• GDP is the total market value of all final goods and services produced within a country in a given period.
• Order the components of the expenditure approach to measuring GDP:

  1️⃣ Consumer Spending (C)

  2️⃣ Investment (I)

  3️⃣ Government Spending (G)

  4️⃣ Net Exports (X - M)
• What does the production approach measure in GDP?

  Value added at each stage
• Consumer Spending (C) refers to total spending by households on goods and services
• What does Investment (I) in GDP measure?

  Spending by firms on capital assets
• What is the circular flow model?

  Conceptual framework of economic flows
• Factors of production include labor, capital, land, and entrepreneurship.


  True
• How does money flow in the circular flow model?

  Households to firms to households
• What is the role of households in the circular flow model?

  Provide factors of production
• Where do households pay firms for goods and services in the circular flow model?

  Product market
• How does GDP differ from GNP?

  GDP measures domestic production
• The components of GDP are vital for understanding economic activity and the circular flow model.


  True
• What are the four main components of GDP?

  Consumer Spending, Investment, Government Spending, Net Exports
• Nominal GDP includes the effects of inflation, while Real GDP does not.


  True
• Real GDP is commonly used to compare economic performance across different time periods
• What is the formula for calculating GDP using the expenditure approach?

  GDP = C + I + G + (X - M)
• Both the expenditure and income approaches for calculating GDP should yield similar results.

  True
• The income approach calculates GDP by summing wages, rent, interest, and profits
• Households provide factors of production to firms in exchange for income