The CircularFlowand theMeasurementof GDPGDP can be measured by total wages, interest,In a very simple model of therent,and profits received by householdseconomy, we could start withhouseholdsand firmsHouseoldsTo measure overalleconomic activity, we couldmeasure the amount ofSSaesuepobosein,rent, and proftmoneythat householdsspend on goods andservices.Orwe couldmeasureUedX:incometohouseholdsFigure 8.1FirmsThecircularflowandthemeasurement ofGDPGDPcanbemeasuredbytotalexpendituresongoodsandservicesby households, firms, govermment, and the rest of the worid.11@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 11 The Circular Flow and the Measurement of GDP In a very simple model of the economy, we could start with households and firms. To measure overall economic activity, we could measure the amount of money that households spend on goods and services. Or we could measure income to households. The circular flow and the measurement of GDP Figure 8.1
Adding Governmenttothe CircularFlowGDP can be measured by total wages, interest,Let's add in some morerent, and profits received by householdslayers. We'll start withgovernment.HousenoldsHow does the governmentaffect economic activity?Payments ofTaxeswages andinterest.angIt takes in taxes fromtransier paymentsSsesooro,rent, and profhouseholds and firmsGovernmerIt uses those taxes tosnebuy goods and servicesandto maketransferExpendituresTaxeson goods andpaymentspaymentsservicesto households forwhichthe government does notFigure 8.1Firmsreceive a good orThe circularflow and theservice in return.measurement ofGDPGDPcanbemeasuredbytotalexpendituresongoodsandservicesby households, firms, govermment, and the rest of the worid.12@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 12 Adding Government to the Circular Flow Let’s add in some more layers. We’ll start with government. How does the government affect economic activity? • It takes in taxes from households and firms. • It uses those taxes to buy goods and services, and to make transfer payments—payments to households for which the government does not receive a good or service in return. The circular flow and the measurement of GDP Figure 8.1
Adding the Rest of the World to the Circular FlowGDP can be measured by total wages, interest,Some economic activityrent,and profits received by householdstakes place betweenisonimportshouseholds, firms, and theHousenoldsrest of the world.HouseholdsbuygoodsPayments ofTaxeswagesandandservicesfromfirmsinterest.angtransierpaymentssaoias puespo oseanipuaoxsrent, and proftinothercountries;theseare known as importsGovemmenRestoftheWordFirmssellgoodsand二servicestohouseholdsExpendituresTaxesin other countries; theseon goods andservicesare known as exportsexportsFigure 8.1FirmsThe circularflow and themeasurement ofGDPGDPcanbemeasuredbytotal expendituresongoodsandservicesby households, fims, govermment, and the rest of the worid13@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 13 Adding the Rest of the World to the Circular Flow Some economic activity takes place between households, firms, and the rest of the world. • Households buy goods and services from firms in other countries; these are known as imports. • Firms sell goods and services to households in other countries; these are known as exports. The circular flow and the measurement of GDP Figure 8.1
Adding the Financial System to the CircularFlowGDP can be measured by total wages, interest,Finally,there arefirmsthatrent,and profits received by householdsdeal specifically in flows ofsonimportsmoney;we label theseHousenoldsfirms the financial systemHouseholdselectnottoPayments afTaxeswagesandspend some of theirinterest.angtransier paymentsorertincome, and insteadandproftsave it with financialBorrowingGovemmenFinancial SystemRestoftheWordsystemfirmslikebanksThese financial systemExpendituresTaxesfirms lend money toon goods andservicesotherfirmsandthegovernment.exportsFigure 8.1FirmsThecircularflowandthemeasurementofGDPGDPcanbemeasured bytotal expenditures ongoods and servicesby households, firms, govermment, and the rest of the worid.14@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 14 Adding the Financial System to the Circular Flow Finally, there are firms that deal specifically in flows of money; we label these firms the financial system. • Households elect not to spend some of their income, and instead save it with financial system firms like banks. • These financial system firms lend money to other firms and the government. The circular flow and the measurement of GDP Figure 8.1