The Circular Flow Model and
Gross Domestic Product
How Much Did Your Country Produce Last Year?
Simple Circular Flow Diagram
NOTE--There are only two actors
in this simple model:
1. Households, and
2. Firms
• What do Households provide
to Firms?
• What do Firms provide to
Households?
Expanded Circular Flow Diagram
NOTE--There are four actors in
this model:
1. Households,
2. Firms,
3. Government, and
4. the Rest of the World.
• Each of these actors
contributes to Gross
Domestic Product (GDP).
• What flows into GDP (look at
the black arrow) in the
diagram?
Gross Domestic Product Defined
GDP: How much “stuff” did our
country’s economy produce this
year?
GDP = C + I + G + X – IM
C = Consumer spending (by
households)
I = Investment spending (by
firms)
G = Government purchases
X = Exports (sold by domestic
firms to the rest of the world)
IM = Imports (purchased by
domestic consumers from the
rest of the world)