AP MACRO 1.2

What does the circular flow model represent?

The flow of money, goods, services, and resources between households, firms, government, banks, and the foreign sector

Who are the five key participants in the circular flow?

Households, firms, government, foreign sector, banking sector

How do households participate in the economy?

Demand goods/services, supply capital, pay taxes. and demand exports

How do firms participate in the economy? 

Produce goods/services, demand resources from households, sell exports abroad 

What are governments main roles in the circular flow? 

Collects taxes, provides public goods, builds infrastructure 

What happens when the government spends more than it collects in taxes?

Budget deficit

How does the foreign sector affect the circular flow?

imports= leakage, exports=injection

How does the banking sector affect the circular flow?

Savings = leakage (money not spent) , Loans= injection (fund investment & consumption)

What are injections?

Spending that adds to economic activity

What are leakages?

Money leaving the flow (taxes, savings, imports) 

What is GDP 

The total market value of all goods/services produced in a country in one year 

Why are spending, income, and output equal in GDP?

Every dollar spent is a dollar earned, and every good bought was produced.

What is the expenditure approach equation for GDP

GDP= C+I+G+Xn

What are the three approaches to measuring GDP?

Expenditure, income, output

What does I (investment) include

Firm spending on capital equipment + household spending on new homes

What does "G" (Government Spending) include and exclude?

Includes government purchases of goods/services; excludes transfer payments

What does Xn (Net Exports) equal

Exports-Imports

What is called when imports > exports

Trade deficit (negative Xn)

What is it called when exports > imports?

Trade surplus (positive Xn)