2.1 Circular Flow Model & GDP

Question 1

The Product Market

Answer 1

the “place” where goods & services produced by businesses are sold to households

Question 2

The Resource (Factor) Market

Answer 2

the “place” where resources ( land, labor, capital, entrepreneurship) are sold to businesses

Question 3

What does the resource market give to businesses

Answer 3

Resources

Question 4

What do businesses give to the Product Market

Answer 4

Goods & Services

Question 5

What does the Product Market give to Individuals ?

Answer 5

Goods & Services

Question 6

What do Individuals give to the Resources Market?

Answer 6

Resources

Question 7

What does the Resource Market give to Individuals

Answer 7

Income

Question 8

What do Individuals give to the Product Market?

Answer 8

Money/Spending

Question 9

What does the Product Market give to Businesses?

Answer 9

Revenue

Question 10

What do Businesses give to the Resource Market?

Answer 10

Money/ Costs

Question 11

What do Gov. get from individuals & businesses

Answer 11

Taxes

Question 12

What do Gov. give individuals?

Answer 12

Welfare & Public Goods

Question 13

What does Gov. give to businesses?

Answer 13

Subsides & Public Goods

Question 14

Private Sector

Answer 14

Part of the economy that is ran by individuals & businesses

Question 15

Public Sector

Answer 15

Part of the economy that is controlled by the gov.

Question 16

Factor Payment

Answer 16

Payment of factors of production, namely rent, wages, interest, & profit

Question 17

Transfer Payment

Answer 17

When the gov. redistributes income ( welfare, social security)

Question 18

Subsides

Answer 18

Gov. payment to businesses

Question 19

What are the 3 Macro goals all Countries have ?

Answer 19

1. Promote Economic Growth
2. Limit Unemployment
3. Keep Prices Stable ( Limit Inflation)

Question 20

Gross Domestic Product (GDP)

Answer 20

The dollar value of all final good & services produced within a country in one year

Question 21

Dollar Value

Answer 21

GDP measures in dollars

Question 22

Final Good

Answer 22

GDP only counts NEW goods & services

Question 23

How is GDP used?

Answer 23

1.Compare to previous yesrs( is there growth?)

2. Compare policy changes (Did a new policy work)
3. Compare to other countries ( Are we better off?)

% Change in GDP = Year 2- Year 1/ Year 1 x 100

Question 24

GDP Per Capita ( per person)

Answer 24

GDP divided by the population. It identifies in average how many products each person makes

It is the best measure of a nation’s standard of living

Question 25

Economic System

Answer 25

Capitalism promotes innovation & provides incentives to improve productivity Reason some countries have higher GDP

Question 26

Rule of Law

Answer 26

Countries w/ solid institutions & political stability have historically had more economic growth Reason Higher GDP Countries

Question 27

Capital Stock

Answer 27

Countries that have more machines & tools are more productive Reason Higher GDP Countries

Question 28

Human Capital

Answer 28

Countries that have better education & training are more productive Reason Higher GDP Countries

Question 29

Natural Resources

Answer 29

Countries that have access to more natural resources are more productive Reason Higher GDP Countries

Question 30

Intermediate Goods

Answer 30

Goods inside final goods don’t count towards GDP

Question 31

Nonproduction Transaction

Answer 31

Financial Transaction ( nothing produced) - stocks, bonds Used Goods -used car & clothes

Question 32

Non-Market & Illegal Activities

Answer 32

Things made at home - household production. Ex: taking care of your kids Black Market- Unpaid Labor, Black Market

Question 33

Expenditure Approach

Answer 33

Add up all the spending on final goods & services produced in a given year C + G + I + Xn Calculate GDP

Question 34

Income Approach

Answer 34

Add up all the income earned from selling all final goods & services produced in a given year Labor + Rental + Interest + Profit Calculate GDP

Question 35

Value- Added Approach

Answer 35

Add up the dollar value added at each stage of the production process Calculate GDP

Question 36

Labor Income

Answer 36

Wages earned from performing work

Question 37

Rental Income

Answer 37

Income earned from property owned by individuals

Question 38

Interest Income

Answer 38

Interest earned from loaning money to businesses

Question 39

Profit

Answer 39

Money businesses have after paying all their costs

Question 40

Consumer Spending

Answer 40

Purchase of final goods & services by individuals

Question 41

Businesses Investments

Answer 41

Business spending on tools & equipment

Question 42

Gov. Spending

Answer 42

Ex: Schools , Tanks Not Transferable Payments

Question 43

Net Export

Answer 43

Export(x) - Import(m)

Question 44

3 Components of Consumer Spending

Answer 44

1. Durable Goods: refrigerator & washing machines 2. Non-Durable Good: food & clothes 3. Services: dental work & tutoring

Question 45

What does investment mean in GDP?

Answer 45

When Businesses buy capital like machines, resources & tools

Question 46

What is Gov. Spending

Answer 46

Gov. Payments for goods & services not transfer payment like welfare & social security

Question 47

What does the financial sector give to businesses?

Answer 47

Private Borrowing

Question 48

What does financial sector give to the government?

Answer 48

Public Borrowing

Question 49

What does gov. give to the financial sector?

Answer 49

Public Savings