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AP Economics

This module provides an overview of the Circular Flow Model and Gross Domestic Product (GDP) in AP Economics, presented by Mr. Bernstein. It explores the National Accounts, which assess the flows and expenditures of a country's economy, akin to a corporation's income statement. The Circular Flow Diagram illustrates interactions between households and firms in product and factor markets. Additionally, we discuss the definitions of GDP, its calculation methods—Expenditures and National Income approaches, and what is excluded from GDP measurements.

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AP Economics

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  1. AP Economics Mr. Bernstein Module 10: The Circular Flow and Gross Domestic Product January 2019

  2. AP EconomicsMr. Bernstein The National Accounts • Produced by Department of Commerce • Income and Product Accounts • Measures flows and expenditures of a country • Equivalent of Income Statement for Corporation

  3. AP EconomicsMr. Bernstein Circular Flow Diagram

  4. AP EconomicsMr. Bernstein Circular Flow Diagram • Households and Firms • Product Market is the market for goods and services • Factor Markets are the markets for resources or inputs firms need to produce goods and services • Each has its own supply and demand

  5. AP EconomicsMr. Bernstein Expanded Circular Flow Diagram

  6. AP EconomicsMr. Bernstein Expanded Circular Flow Diagram • More complex • Households do not directly many sell factors of production to firms (other than labor) – financial markets intermediate • US government, other countries also included • Notice inflows = outflows for all markets or elements

  7. AP EconomicsMr. Bernstein Gross Domestic Product: Definition • The total market value of all final goods and services produced within a country in one year • Market value – the value of production • Final goods – no intermediate goods • Within a country • What if a product is assembled in China, but the components came from Vietnam and the corporate headquarters is in California? • In one year – or within a given time period

  8. AP EconomicsMr. Bernstein Gross Domestic Product: Calc Method 1 – Expenditures Approach • Spending on Domestically Produced Final Goods and Services • Divided into four categories of buyers • Personal Consumption Expenditures (C) • Domestic Investment (I) • Government Purchases (G) • Net Exports (Xn)…aka (X – IM) • GDP = C + Ig + G + Xn

  9. AP EconomicsMr. Bernstein Gross Domestic Product: Calc Method 2 – National Income Approach • Roughly, all expenditures must equal all income • So, Total Factor Income (National Income) also = GDP • Divided into five categories of income • Compensation of all Employees, home or abroad • Rents • Interest Earned • Proprietors’ Income • Corporate Profit (undistributed) • NI = Wages + Rents + Interest + Profits

  10. AP EconomicsMr. Bernstein

  11. AP EconomicsMr. Bernstein

  12. AP EconomicsMr. Bernstein Gross Domestic Product: What’s Not Included • Intermediate Goods (i.e. tires on a new car) • Goods produced in another country • Goods Produced at Home (i.e. value of DYI projects) • Illegal or underground activities (i.e. drug dealing and/or working for cash “off the books”) • Financial transactions (i.e. buying or selling stocks) • Used goods (i.e. buying a used textbook)

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