The Circular Flow Model & GDP

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???:?? ???:Fei Wu ? ?:?? ? ?:????

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Disclaimer ???? Economics is NOT about … … how to make money Economics is about … … Well, it’s a long story.

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A First Lecture on Macroeconomics: The Circular Flow Model & GDP ???????: ?????? & ??????

Technical Stuff : 

Technical Stuff The processed format at the site works badly for many animations in the slideshow. Please download the pps file for a better experience.

The Circular Flow Model (Two-Sector) : 

The Circular Flow Model (Two-Sector) Households Firms Factor Market Input Payment Income Product Market Output Expenditure Revenue

Three Approaches : 

Three Approaches ? ? ? ? Income Approach ? Output Approach Expenditure Approach GDP (Gross Domestic Product)

There are four roommates with back pains ... : 

There are four roommates with back pains ... Roommates: J, K, L, M The Couch Massage x $500 x An Example for GDP Yes, it’s a fake story. But it’s NOT a joke! 1 J ? K 1: K ? L 2 J ? K K ? L 2: L ? M 3 L ? M 3: M ? J 4 M ? J 4: Has the total quantity of money changed? If not, does it mean the four roommates have labored in vain?

Lessons Learned : 

Lessons Learned The earth taken as a whole (or being looked at from the outer space) … It’s the flow of real stuff (the material flow) that really matters; and money (the cash flow) only works as a lubricant. Moreover, real stuff gets used up and needs to be replenished (although it can be claimed that …), but money simply changes hand -- with its total quantity staying constant, at least so in our simple story.

The Circular Flow Model (Four-Sector) : 

The Circular Flow Model (Four-Sector) The Standard Chart in Most Textbooks

The Circular Flow Model (Four-Sector) : 

The Circular Flow Model (Four-Sector) Households Firms Factor Market Input Payment Income Product Market Output Consumption Revenue Financial Intermediaries Government Foreign Countries Saving eXport Investment G Purchase iMport Tax

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Households Firms Factor Market Input Payment Income Product Market Output Consumption Revenue Financial Intermediaries Government Foreign Countries Saving eXport Investment G Purchase iMport Tax GDP: the Expenditure Approach Output = ?

GDP: the Expenditure Approach : 

GDP: the Expenditure Approach Households Firms Product Market Output Consumption Financial Intermediaries Government Foreign Countries eXport Investment G Purchase iMport Output = ?

GDP: the Expenditure Approach : 

GDP: the Expenditure Approach Product Market Output Consumption eXport Investment G Purchase iMport Output = ? Into Product Market: Output + M Out of Product Market: C + I + G + X In = Out ? Output + M = C + I + G + X Output = C + I + G + X - M

Why Bother with the Expenditure Approach? : 

Why Bother with the Expenditure Approach? Practically, for accuracy (perhaps): Direct Approach: Output ~ Indirect Approaches: Income ~, Expenditure ~ Theoretically, behind the various components of expenditure are the different groups of people with different behavioral patterns: households (C), firms (I), government (G), and foreigners (X). Economics studies the behavior of people. Most importantly ... the income of households (Income ~) ? the value of the output they have contributed to (Output ~) ? the price that buyers pay for the output (Expenditure ~)

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Fei Wu currently teaches AP & A-Level economics at Beijing Royal School Find out more about the author at http://hi.baidu.com/feiwuenglish Contact the author at feiwu1979@gmail.com