Circular flow of income & measures of GDP

What are the two fundamental economic agents in a simple economy?

Households and firms (or businesses).

What do households provide to firms?

Factors of production: land, labor, capital, and enterprise.

What do firms do with the factors of production?

Combine them to make goods and services.

What do households receive in return for providing factors of production?

Factor incomes.

What is the reward for labor?

Wages and salaries.

What is the reward for land?

Rent.

What is the reward for entrepreneurship?

Profit.

What is the reward for capital?

Interest.

What are the two sectors ignored in a simplified economy model?

The government and the international sector.

What are leakages (or withdrawals) from the circular flow?

Savings (S), taxation (T), and imports (M).

What are injections into the circular flow?

Investment (I), government spending (G), and exports (X).

What is the technical definition of investment?

When firms spend on capital goods.

What are the three methods to calculate GDP?

Output method, income method, and expenditure method.

What is the output method of calculating GDP?

Adding up the final value of all goods and services produced in an economy in a year.

What is the income method of calculating GDP?

Adding up all the factor incomes earned in an economy in a year (wages, salaries, profit, interest, and rent).

What is the expenditure method of calculating GDP?

Adding up the total expenditure on a country's goods and services in a year (Consumer Expenditure + Investment + Government Spending + Net Exports).

What is the equation for the expenditure method of GDP?

C + I + G + (X - M)

What is the relationship between output, income, and expenditure?

Output equals income equals expenditure.

What is the role of households in the circular flow?

Provide factors of production and spend income on goods and services.

What is the role of firms in the circular flow?

Combine factors of production to produce goods and services and pay factor incomes.

What does 'C' stand for in the expenditure method of GDP?

Consumer Expenditure.

What does 'I' stand for in the expenditure method of GDP?

Investment.

What does 'G' stand for in the expenditure method of GDP?

Government Spending.

What does 'X' stand for in the expenditure method of GDP?

Exports.

What does 'M' stand for in the expenditure method of GDP?

Imports.

What is the significance of net exports (X-M)?

It represents the difference between exports and imports, contributing to GDP.

What are capital goods?

Goods that are used in the production of other goods and services.

What is the relationship between leakages and injections in macroeconomic equilibrium?

Leakages are equal to injections.

What is the relationship between aggregate demand and the expenditure method of calculating GDP?

the relationship between aggregate demand and the expenditure method of calculating GDP is the same.