Chapter 11 Measuring the size of the economy Part 1

Flashcards based on Chapter 11 lecture notes covering GDP, expenditure approach, real vs. nominal GDP, and the circular flow model.

Gross Domestic Product (GDP)

A widely reported measure of a nation’s economic performance; the market value of all final goods and services produced within a nation’s geographic borders during a period of time.

What does GDP include?

New domestic production of final goods and services produced for the ultimate user.

What does GDP NOT include?

Intermediate goods and second-hand goods.

Non-productive financial transactions that GDP does not count

Transactions like giving gifts, trading stocks and bonds, or making transfer payments.

What are Transfer Payments?

Government payments to individuals, not in exchange for goods or services currently produced (e.g., pensions, job search allowance).

GDP and the whole economy

GDP counts the value of production in all markets for products, resources, consumers, workers, and businesses.

The Circular Flow Model: How do goods and services flow?

Goods and services flow continuously between producers (firms) and buyers (households).

What is the main takeaway from the Circular Flow Model?

Aggregate (total) expenditures is equal to aggregate (total) income.

In the Circular Flow Model, what three dollar amounts are equal?

Spending (=GDP), Revenues (=GDP), Income (=GDP).

What is a flow?

A rate of change in a quantity during a given time period (e.g., weekly consumption spending, annual income).

What is a stock?

A quantity measured at one point in time (e.g., the amount of money in a bank account).

Name at least 2 components of the Circular Flow Model

Consumption, Savings, Taxation, Imports.

Name at least 2 components of the Firms Sector

Economic resources, Output, Exports, Investment, Government expenditure.