The Circular Flow and GDP

Circular Flow of Income

The financial interactions between households and firms, illustrating how income circulates in an economy.

Households in Economic Context

Entities that provide labor and resources to firms, receive income, and spend on goods and services.

Firms in Economic Context

Businesses that produce goods and services using resources from households and sell these to them.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period.

Intermediate Goods

Products used as inputs in the production of other goods, not counted in GDP to avoid double-counting.

Final Goods

Products purchased for final use, included in GDP to measure economic output accurately.

Investment

Spending by businesses on capital goods for future production, such as machinery.

Consumption

Household spending on goods and services for personal use, a significant part of GDP.

Income Approach to GDP

Calculates GDP based on total income earned from resources used to produce goods and services.

Expenditure Approach to GDP

Calculates GDP based on total spending on goods and services.

Components of GDP Formula

Y = I + C + G + NX, where Y is GDP, I is Investment, C is Consumption, G is Government spending, and NX is Net Exports.

Net Exports (NX)

The difference between a country's exports and imports; calculated as exports minus imports.

Value Added Approach

A method to calculate GDP that sums the value added at each stage of production.

GDP Measurement Consistency

Regardless of the measurement method used, all approaches should yield the same GDP value.

Income Categories in GDP

Wages, rent, interest, and profits that contribute to the overall income in the economy.