The Circular Flow and Gross Domestic Product
Student Guide
Name
WE JUST LEARNED how to diagram supply and demand charts.
THE GOAL OF THE LESSON OVER THE NEXT TWO DAYS IS to
• IDENTIFY how economists use aggregate measures to track the performance of the economy
• EXPLAIN the circular flow diagram of the economy
• DEFINE what gross domestic product, or GDP, is and the three ways of calculating it
1. As a class, TAKE A ONLINE PRE-QUIZ over the module 10 vocabulary using this online textbook
virtual vocabulary card quiz maker.
2. WATCH this video hook (up to 1:16) of Friedman on investment capital than TAKE NOTES and follow
along on the PowerPoint as the instructor reviews the “Simple Circular Flow Diagram”. The diagram needs to
be memorized for the AP Exam. (Click here for the extra help video.)
• Factor Markets: Where resources, especially capital and labor, are bought and sold (business to business)
• Product Markets: Where goods and services are bough and sold
3. ANSWER the following questions using the “Expanded Circular Flow Diagram” from the PowerPoint.
Prepare to share your responses with the classroom. You can use the vocabulary cards to respond to the
questions.
• Who are the primary and secondary benefactors of “Household Private Saving”?
• Who are the primary and secondary (two) benefactors of “Government Purchases of Goods and Services”?
• Bonus Question: What does this have to do with China benefiting from lending our Government money”
• Who are the primary and secondary benefactors of “Foreign Lending and the Purchase of Stock” from the
“Rest of the World”?
• Bonus question: What does this have to do with the “Rescue of the financial markets in 2008?”
• Who are the primary and secondary benefactors of “Government Transfers”?
• Bonus Question: How can government safety net services (ie. Social Security and Unemployment Insurance)
impact the economy? (Note – your answer will not include “leakage” which we will talk about later)
4. DISCUSS responses as a class
Homework: Review GDP reading, video from online classroom, and PowerPoint for GDP concept check.
Day 2
5. TAKE the GDP Concept Check. We will review the answers at the end of the bell.
6. REVIEW GDP Formula using PowerPoint (Slide 6), which is full of great examples.
• GDP: The total market value of all final goods and services produced within a country in one year.
• Market Value: We must compute the value of production, not just the production
• GDP includes only final products and services; it avoids double or multiple counting, by eliminating any
intermediate goods.
• It doesn’t matter where it is consumed, it matters where it is produced.
8. TAKE NOTES over what is NOT included in GDP
• Non-market products (babysitting, serving others, home cooking, etc.)
• Intermediate goods (don’t count the steel we make here and the car we made here with that steel, that
would be double counting, only count the end product, etc.)
• Resource depletion (anytime a resource is extracted from the earth, such as oil, that depletion does not
count against our GDP)
• Illegal goods (Illegal arms, drug trafficking, etc.)
9. LISTEN as the instructor briefly reviews Gross National Income
• NI = Wages + Rents + Interest + Profits
The sum of the below entries equals national income: all income earned by American supplied resources,
whether here or abroad. Demonstrates how the expenditures on final products are allocated to resource
suppliers.
Compensation of employees: (includes wages, salaries, fringe benefits, salary and supplements, and payments
made on behalf of workers like social security and other health and pension plans).
Rents: payments for supplying property resources (adjusted for depreciation it is net rent).
Interest: payments from private business to suppliers of money capital.
Proprietors’ income: income of unincorporated businesses, sole proprietorships, partnerships, and
cooperatives.
Corporate profits: After corporate income taxes are paid to government, dividends are distributed to the
shareholders, and the remainder is left as undistributed corporate profits.
10. EVALUATE your concept check and change answers you believe need to be changed.
11. CHECK YOUR ANSWERS as the instructor reviews the GDP concept check answers
TOMORROW WE WILL LEARN how to interpret real GDP
Homework: Read Module 11 and complete Tackle the Test Multiple Choice Questions 1-5