Measuring Macroeconomic
Output
Circular Flow and GDP
Circular Flow Model
A simplified model of the macro
economy that illustrates flows of
money, goods and services
At each “node” of the model, money
going out = money going in
Figure 10.1 The Circular-Flow Diagram
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Gross Domestic Product (GDP)
• A macroeconomic measure of output
• The value of all final goods and services
produced in a country in a given year
• Three methods of calculating
– Value-added approach
– Expenditure approach
– Income approach
Figure 10.2 An Expanded Circular - Flow Diagram: How Money Flows Through the Economy
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 10.3 Calculating GDP
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Expenditure Approach
GDP = C + G + I + NX
C = Consumer spending
G = Government spending
I = Investment spending
NX = Net exports = (Exports – Imports)
Consumer Spending
• Money spent by households on final
goods and services
–DOES NOT include
1. Taxes paid to governments
2. Money invested or saved in financial
institutions
3. Money spent outside the country
Government Spending
• Money spent by governments (at all
levels) on final goods and services
–DOES NOT include “transfer payments”
• Social security
• Unemployment
• Business subsidies
Investment Spending
• Money spent by businesses on final
goods and services (productive physical
capital)
– Does NOT include intermediate goods or
inputs used in production
– DOES include
• Increase in inventories
• New homes
Net Exports
• Exports
– The value of final goods and services produced in
the country and sold overseas
• Imports
– The value of final goods and services produced
overseas and sold in the country
Figure 10.4 U.S. GDP in 2009: Two Methods of Calculating GDP
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers