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 DiagramRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 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 EconomyRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 10.3 Calculating GDPRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Expenditure Approach

GDP = C + G + I + NXC = Consumer spendingG = Government spendingI = Investment spendingNX = Net exports = (Exports – Imports)

Consumer Spending

• Money spent by households on final goods and services–DOES NOT include

1. Taxes paid to governments2. Money invested or saved in financial

institutions3. 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 GDPRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers