1. 2 Methods and 4 Categories of GDP
Circular Flow and GDP
2 Methods and 4 Categories of GDP

2. Basic Principles of Circular Flow
Circular flow model is MACRO picture of economy
National accounts indicate levels of economic development (flow of money)
One principle that applies to BOTH – Flow of money into each sector is equal to flow of money out of that sector
This also applies to the EXPANDED circular flow model.
Complete expanded circular flow model before moving on…

3. Elements of Expanded Model
Entity
New information reflected
Households
Part of household income is returns on private savings (stocks & bonds)
Households receive govt transfers & pay taxes
Businesses
Investment spending (capital goods & inventories) and inputs make up costs
Businesses pay taxes
Financial market
Households, businesses, the govt, and foreign entities buy/sell stocks & bonds
Government
The govt collects taxes, provides transfers, and purchases goods & services
Rest of the world
Imports/exports, foreign lending & borrowing reflect the flow of money into & out of the U.S.

4. Gross Domestic Product – Final Goods & Services
Only includes final goods & services (direct to consumer), not intermediate (producer-to-producer sales)
This is to avoid counting values two or more times

5. Gross Domestic Product – Two Methods
Value of production – To avoid duplication, each step in production only counts for “value added” – difference between sales & value of inputs purchased
Value of spending – Again, only counts final purchases (by consumers). Capital goods that last for years count in GDP.

7. Gross Domestic Product – Four Categories
GDP = C + I + G + X – IM
Imports are “leakage” as this is money that exits circular flow

8. Gross Domestic Product: What’s Included/Excluded?
Investment spending by businesses
Domestically produced final goods & services
A note about inventory – Once released for sale, it is subtracted from GDP.
Excluded
Intermediate goods & inputs that are used up in production
Used goods
Stocks & bonds
Imports
Government transfers
Nonmarket transactions