The Circular Flow and GDP
Introduced| English | Meaning |
|---|---|
| gross domestic product/ɡrəʊs dəˈmestɪk ˈprɒdʌkt/ | The value of final goods and services produced within an economy's territory over a specified period. |
| market value/ˈmɑːkɪt ˈvæljuː/ | The monetary value of an item or output measured using the prices at which it is traded in the market. |
| final goods/ˈfaɪnl ɡʊdz/ | Goods purchased for final use rather than for further processing or incorporation into another good during the accounting period. |
| circular flow model/ˈsɜːkjʊlə fləʊ ˈmɒdl/ | A representation of the movements of resources, goods, services and payments among sectors of an economy. |
| households/ˈhaʊshəʊldz/ | Individuals or groups living together who consume goods and services and supply productive resources. |
| firms/fɜːmz/ | Organisations that use inputs to produce goods or services for sale. |
| government/ˈɡʌvənmənt/ | The institutions responsible for making and implementing public decisions and laws within a jurisdiction. |
| intermediate goods/ˌɪntəˈmiːdɪət ɡʊdz/ | Goods used up or incorporated into the production of other goods during the accounting period. |
| double-count/ˈdʌbl kaʊnt/ | Include the same contribution to output more than once, such as counting both an intermediate input and the full value of the final product containing it. |
| used goods/juːzd ɡʊdz/ | Goods produced in an earlier period and resold; their resale value is not new current production, although current resale services can add to GDP. |
| purely financial transactions/ˈpjʊəli faɪˈnænʃl trænˈsækʃnz/ | Exchanges of existing financial claims that do not themselves represent newly produced goods or services. |
One number for a whole economy
- How do you measure something as vast as a country's output?
- You add up the value of everything it produces in a year.
- That single figure is gross domestic product 国内生产总值 (GDP).
- A simple model shows why a nation's output and its income are the same thing.
The circular flow
- GDP is the market value 市场价值 of all final goods 最终产品 and services made in a country in a year.
- The circular flow model 循环流动模型 tracks money among households 家庭, firms 企业, and government 政府.
- Households sell resources to firms and earn income; firms make goods and sell them back.
- Every dollar spent is a dollar earned — so total spending equals total income.
GDP is the market value of all ______ goods and services produced in a country in a year.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Only final goods count, so we don't double-count the intermediate parts.
In the circular flow, total spending is always greater than total income.
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False. Every dollar a household spends becomes a dollar of income for someone, so total spending equals total income.
Match each way of measuring GDP to what it adds up.
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All three give the same GDP, because spending = income = value created.
What GDP leaves out
- Intermediate goods 中间产品 — used up to make something else (flour for a bakery); only the final bread counts, or we double-count 重复计算.
- Used goods 二手商品 — a resale was already counted when the item was new.
- Purely financial transactions 纯金融交易 — buying a stock just moves money; it produces nothing new.
Does it count in GDP?
GDP counts only final goods and services made this year. Intermediate goods, used goods, and financial trades are excluded.
Select all that are excluded from GDP.
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Intermediate, used, and financial transactions are excluded; a new final good counts.
The expenditure approach
- Add up all spending on final goods: $GDP = C + I + G + (X - M)$.
- $C$ is consumption, $I$ investment, $G$ government spending, $X$ exports, $M$ imports.
- We subtract imports because they are made abroad, not here.
- Worked idea. With $C = 700$, $I = 200$, $G = 300$, $X = 150$, $M = 100$: $GDP = 700 + 200 + 300 + 50 = 1250$ billion.
With C = 700, I = 200, G = 300, exports X = 150, and imports M = 100, what is GDP?
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GDP = C + I + G + (X − M) = 700 + 200 + 300 + (150 − 100) = 1250.
In GDP = C + I + G + (X − M), why do we subtract imports (M)?
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Spending on imports is included in C, I, or G, but the output was made abroad — so we subtract it.
GDP is the market value of all final goods made in a country in a year. The circular flow shows why total spending equals total income. Measure it with the expenditure approach: $GDP = C + I + G + (X - M)$, excluding intermediate goods, used goods, and financial transactions.
Write from a GDP of 1040
- C is 600, I is 180, G is 220, exports are 70 and imports are 30.
- Find GDP.
Consumption is 600, investment is 180, government spending is 220, exports are 70 and imports are 30. What is GDP?
600 plus 180 plus 220 is 1000, and 70 minus 30 is 40.
What is GDP?
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Domestic spending of 1000 plus net exports of 40 is 1040.