Circular Flow and GDP Concepts (Video Notes)

Flashcards covering Circular Flow, GDP concepts, real vs nominal GDP, investment concepts, and cash flow mechanics from the lecture notes.

What is the circular flow model?

A graphical representation of the circular flow; a model showing the mechanics of the open market economy.

How many groups of economic agents are in the circular flow, and who are they?

Four groups: government, domestic firms, households, and the foreign sector.

What are the three groups of markets in the circular flow?

Goods and services markets, economic resources (factors of production) markets, and financial markets.

In these notes, what is the focal point of study within the circular flow?

The financial markets.

Who predominantly engages in the production of goods and services?

Domestic firms (and firms in the foreign sector).

What does consumption refer to in this context?

The use of a good or service; it does not necessarily mean eating.

State the GDP equation as given in the notes.

GDP = (Goods & Services sold to Households) + (Goods & Services sold to Firms/Households) + (Goods & Services sold to Government) + (Goods & Services exported) - (Goods & Services imported).

Through which markets do wages, rents, and interest flow back to households?

Through the economic resources markets (land, labor, capital).

GDP is commonly equated with which two concepts?

Income and output.

What is the difference between real GDP and nominal GDP?

Real GDP is inflation-adjusted; nominal GDP is unadjusted for inflation.

From which perspectives can GDP be viewed?

Production, income, and value-added perspectives.

GDP and GDI should be in line; what indicates a discrepancy?

A statistical discrepancy.

What is GDP per capita and how is it used?

GDP divided by the adult population; used to compare standards of living across countries.

What does a higher GDP per capita indicate?

A higher standard of living.

Why might an increase in GDP not reflect higher production?

Inflation; changes in price levels. Economists adjust using chained dollars.

Which GDP measure is inflation-adjusted?

Real GDP.

How is rate of change calculated? Provide both forms.

(New Value - Old Value) / Old Value; multiply by 100 to get percent; alternative: (New/Old) - 1.

What do macro investments include?

Purchases of newly produced capital goods and newly produced housing; inventory investment is the difference between produced and unsold.

Do new homes or existing homes count toward GDP?

Only newly produced houses count toward GDP.

Give examples of residential fixed investment vs non-residential.

Residential fixed: a household hires a roofer to fix their home. Non-residential fixed: a house used for rental by a business.

What is disposable income?

Income remaining after paying income taxes.

What are free cash flows?

Cash remaining after all necessary expenditures; two flavors: to the firm and to equity; used to determine present value.

Why is depreciation added back when calculating free cash flow?

Because depreciation is a non-cash expense.

What is change in working capital in free cash flow calculation?

Subtracted to account for cash inflows and outflows related to short-term assets and liabilities.

How are debt retirement and new debt treated in FCF calculations?

Debt retirement is subtracted; new debt issuance is added.

How is cost allocated for assets with long useful lives?

Costs are allocated over their useful life (e.g., 20–40 years).

What are the two flavors of free cash flow?

Free cash flows to the firm and free cash flows to the equity.

What is free cash flow used for in business valuation?

To determine the present value of a business.