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Circular flow of income and expenditures | Macroeconomics | Khan Academy

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Parsing gross domestic product | GDP: Measuring national income | Macroeconomics | Khan Academy

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Investment and consumption | GDP: Measuring national income | Macroeconomics | Khan Academy

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Value added approach to calculating GDP | AP Macroeconomics | Khan Academy

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Income and expenditure views of GDP | GDP: Measuring national income | Macroeconomics | Khan Academy

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Components of GDP | GDP: Measuring national income | Macroeconomics | Khan Academy

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The Circular Flow Model Explained - AP/IB/College - ReviewEcon.com

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The circular flow model illustrates the flows of money, resources, and products throughout an economy. It's not overly complicated, but there are some key things you should know about it. For those who are reviewing this for an AP Economics exam, this most often shows up as multiple choice questions.

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Used products are not counted because those products were already counted when they were new. So used cars, or sales from thrift shops are not counted in GDP.

Financial transactions are not counted because there is no good or service being produced. Purchases of stocks, bonds, etc. shuffle money around an economy but since they are not goods or services, they are not counted.

4. How is GDP Counted?
There are three methods for calculating GDP and they relate to the circular flow diagram of the economy; output-expenditures, the value added approach, and the income approach.The first two methods track economic activity through the product market and the third tracks economic activity through the resource market.

For the Advanced Placement (AP) Macroeconomics Exam, the output expenditure method for calculating GDP is most important. It adds up the spending within the economy on all new domestically produced final goods and services. The Value Added approach calculates GDP by adding up the contributions an economy's firms make to the final value of new goods and services. The income approach adds the wages, rents, interest, and profit paid for resources in the economy.

5. What is the Output Expenditure Model?
The formula: C+Ig+G+Xn = GDP

Personal Consumption Expenditures (C) is the first variable in the equation. These are all the consumer purchases of goods and services. Things like shoes, cell phones, cars, milk, haircuts, and maid services are counted here.

Gross investment (Ig) includes purchases of physical capital (tools, machines, factories, etc.), residential structures, and changes in inventories. Gross investment included firms purchasing hammers, robots, building new restaurants, etc. and the value of products produced but not yet sold (a change in business inventories). Sudden increases in business inventories are often an indication of a coming economic contraction.

Note: when changes in interest rates impact gross investment the focus is how that changes the quantity of physical capital being purchased in the economy which impacts the economy's growth rate.

Government Purchases (G) include spending by the government (Federal, State, and Local) where the government receives a good or service in exchange for the money spent. So it counts highways, schools, tanks, teachers, police officers, etc. It does not count transfer payments where the government spends money but does not receive a good or service in return; like grants, social security payments, or unemployment compensation.

Net Exports (Xn) is the final variable in the output expenditure model. You may see Xn as (X-M). Net exports is exports (X) minus imports (M); or the value of all goods produced within this country but sold in another country minus the goods produced within another country but sold in this country.

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6 Things To Know About Gross Domestic Product - ReviewEcon.com

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Here you will find a rundown of everything you need to know regarding Gross Domestic Product (GDP) to prepare you for your next AP, IB, or College Macroeconomics Exam.

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GDP and the Circular Flow- Macro Topic 2.1