circular flow and GDP

• the circular flow of income models how money moves through the economy in a constant loop from producers to consumers and back again
• in the circular flow, households give goods and services to firms in exchange for factor income (profit, rent, wages).
• firms provide households with goods and services, in exchange households repay them with payment for these goods and services using factor incomes
• GDP is Gross Domestic Product and is the value of all goods and services produced in an economy within a year. GDP includes final goods and excludes intermediate goods
• final goods are goods that cannot be used to create another good. Intermediate goods are goods used to create another good.
• GDP only includes goods that are purchased brand new in order to avoid double-counting, meaning the shadow market is not included
• GDP per capita refers to the GDP divided by the entire population, and Real GDP refers to GDP adjusted to take inflation into account and nominal refers to a measure in simple monetary terms
• value refers to the market value of goods and services produced, whereas volume refers to the quantity of goods and services produced
• GNP is Gross National Product, which refers to the value of all goods and services produced by the citizens of a country regardless of geographical location
• GNI is Gross National Income and refers to the total factor income of all the citizens of a country regardless of their geographical location
• GDP can calculate economic growth in 3 ways:

  • income method
  • output method
  • expenditure method
• Total GDP provides an overall aggregate, whereas per capita divides by the population and is a more accurate representation of quality of life and economic growth
• the income method is when all factor incomes earned within a year in an economy are added together
• the expenditure method is the total expenditure on goods and services in an economy in a year added together
• the output method refers to the final value of all goods and services produced in an economy over a year
• leakages are ways in which money exits the circular flow, they include:

  • savings
  • imports
  • taxation
• injections are ways in which money enters the circular flow, including:

  • government expenditure
  • investment
  • exports
• if injections are greater than leakages, there is positive economic growth, if there are more leakages, it is negative