AP Economics
Mr. Bernstein
Module 10: The Circular Flow and
Gross Domestic Product
January 22, 2015
AP Economics
Mr. Bernstein
The National Accounts
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Produced by Department of Commerce
Income and Product Accounts
Measures flows and expenditures of a country
Equivalent of Income Statement for Corporation
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AP Economics
Mr. Bernstein
Circular Flow Diagram
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AP Economics
Mr. Bernstein
Circular Flow Diagram
• Households and Firms
• Product Market is the market for goods and services
• Factor Markets are the markets for resources or
inputs firms need to produce goods and services
• Each has its own supply and demand
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AP Economics
Mr. Bernstein
Expanded Circular Flow Diagram
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AP Economics
Mr. Bernstein
Expanded Circular Flow Diagram
• More complex
• Households do not directly many sell factors of
production to firms (other than labor) – financial
markets intermediate
• US government, other countries also included
• Notice inflows = outflows for all markets or elements
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AP Economics
Mr. Bernstein
Gross Domestic Product: Calc Method 1
• The total market value of all final goods and services
produced within a country in one year
• Market value – the value of production
• Final goods – no intermediate goods
• What if product is assembled in China, but the
components came from Vietnam and the corporate
headquarters is in California?
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AP Economics
Mr. Bernstein
Gross Domestic Product: Calc Method 2
• Spending on Domestically Produced Final Goods and
Services
• Divided into four categories of buyers
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Personal Consumption Expenditures (C)
Domestic Investment (I)
Government Purchases (G)
Net Exports (Xn)…aka (X – IM)
• GDP = C + Ig + G + Xn
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AP Economics
Mr. Bernstein
Gross Domestic Product: Calc Method 3
• Total Factor Income (National Income)
• Divided into five categories of income
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Compensation of all Employees, home or abroad
Rents
Interest Earned
Proprietors’ Income
Corporate Profit (undistributed)
• NI = Wages + Rents + Interest + Profits
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AP Economics
Mr. Bernstein
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AP Economics
Mr. Bernstein
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