National accounts: both sides close at 1,320
Introduced| English | Meaning |
|---|---|
| circular flow | the diagram of income moving between households and firms through markets |
| value added/ˈvæljuː ˈædɪd/ | output value minus the cost of bought-in inputs |
| nominal/ˈnɒmɪnl/ | Measured using current monetary values without adjusting for changes in the price level. |
| real/rɪəl/ | Adjusted so that rising prices do not inflate the figure. |
| GDP deflator/ˌdʒiː diː ˈpiː diːˈfleɪtə/ | the ratio of nominal GDP to real GDP, turning current prices into constant prices |
The number every debate hides behind
- "The economy grew 2.2%" is a sentence made of definitions. This lesson builds it from both sides — spending and income — and shows why the two sides cannot disagree.
- The running economy is Aurora: 10 million people, one decade of data, every figure machine-verified.
One loop, five channels
- The circular flow 经济循环流量图 is the whole map: households' spending is firms' income is households' income again. GDP can be counted anywhere on the loop.
- Five channels cross the loop's edge: government (spends 300, taxes 310), the rest of the world (buys 160, sells 200), and banks channeling saving into investment (240).
Count it from both sides
- Expenditure side: $Y = C + I + G + (X - M) = 820 + 240 + 300 + 160 - 200 = 1{,}320$.
- Income side: wages 700 + mixed 100 + profits 330 + rents 78 + interest 42 + production taxes 120 − subsidies 50 = 1,320. Same number, by the logic of the loop — not luck.
Which GDP total does each sale belong to?
Sort Aurora's transactions. Only final sales or value added belong in GDP; second-hand and intermediate sales do not.
Aurora: C 820, I 240, G 300, X 160, M 200. What is GDP, in billions?
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$Y = 820 + 240 + 300 + 160 - 200 = 1{,}320$. Imports enter with a minus because they are already inside C, I and G.
Wages 700, mixed 100, profits 330, rents 78, net interest 42, production taxes 120, subsidies 50. What is the income-side GDP, in billions?
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$700 + 100 + 330 + 78 + 42 + 120 - 50 = 1{,}320$ — the same as the spending side, by the logic of the circular flow.
Higher imports raise GDP because they show the economy is consuming more.
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Imports subtract in $C + I + G + X - M$ because the imported part is already counted inside C, I and G. Consuming more imports alone leaves GDP unchanged.
Final goods and value added
- The mill sells £50 of flour; the bakery sells £200 of bread. Count both and you double-count £50: flour is an intermediate good.
- Count value added 增值 instead — £50 at the mill, £150 at the bakery — and the total is the final sale, £200 ✓. Same answer, no double count.
The mill sells 50 of flour to a bakery that sells 200 of bread. What belongs in GDP?
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Counting both sales double-counts the flour. Final-sale 200 equals value added 50 + 150 - two routes, one total.
Match each transaction to its GDP treatment.
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Production and final sales count; inputs are counted where they land, and transfers move money without producing.
A 2019-built flat sells for 400 in 2024. The full 400 adds to 2024 GDP.
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It was produced in 2019. Only the estate agent's fee - a service produced in 2024 - enters this year's GDP.
Nominal versus real
- Nominal 名义 GDP uses today's prices and mixes growth with inflation. Real 实际 GDP holds prices at a base year.
- Aurora 2024: nominal 1,320, real (2020 prices) 1,100 → GDP deflator $= 1{,}320/1{,}100 \times 100 = 120.0$. The 32.0% nominal rise splits into 10.0% real and 20.0% prices.
Nominal GDP 1,320 against real GDP 1,100 (2020 prices). What is the deflator (2020 = 100)?
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$1{,}320/1{,}100 \times 100 = 120.0$. Cumulative nominal growth of 32% splits into 10% real and 20% prices.
The number that answers "are we better off?"
- Population grew 4.0% (10.00 → 10.40 million), so real GDP per person grew from 100 to $1{,}100/10.4 = 105.8$ — about 5.8% over four years.
- Three arithmetic steps — deflate, then divide by people — sit between every headline and every honest claim about living standards.
Real GDP 1,100 with population 10.40 million. Real GDP per person, in thousands of pounds (one decimal)?
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$1{,}100/10.4 = 105.8$ thousand pounds - about 5.8% above the 2020 level of 100, because population grew 4% while real output grew 10%.
Three accounting slips
- Adding intermediate sales. Flour is inside the bread; count value added or final sales, never both.
- Comparing nominal figures across years. At 20% cumulative inflation that "32% growth" is 10%.
- Forgetting the minus on M. Imports enter negatively because they are already inside C, I and G.
Recap
- $Y = C + I + G + X - M$, and the income side must equal it.
- Real = nominal ÷ deflator; per-capita real is the living-standard measure.
- Value added kills double counting at the source.