AP Macroeconomics AMSCO Guided Notes
2.1: The Circular Flow and GDP
AP Macroeconomics Guided Notes
AMSCO 2.1 - The Circular Flow and GDP
Essential Questions
- How is GDP (as represented by the circular flow model) measured, and what are its components?
I. Macroeconomic Measurement and GDP
1. What is macroeconomic measurement and why is it important for policy makers and businesses?
2. What is GDP and how can changes in GDP indicate the health of an economy?
II. History of the Gross Domestic Product
A. Early Economic Data and the Great Depression
1. Why did policy makers in the 19th and early 20th centuries struggle to evaluate the economy?
2. How did the Great Depression lead to the development of more refined economic statistics?
B. From GNP to GDP
1. What is the key difference between GNP and GDP, and why did the BEA switch to featuring GDP in 1991?
III. The Circular Flow
1. What is the circular flow model and what does it illustrate about a market economy?
A. Two-Sector Model
1. What are the two sectors in the two-sector model and what role does each play?
2. How do money and goods flow between households and businesses in the product and resource markets?
B. Three-Sector Model
1. Why is the government included in the three-sector model and how does it affect the circular flow?
2. What forms do taxes take and how do they flow through the three-sector model?
C. Four- and Five-Sector Models
1. What additional sectors are included in the four-sector and five-sector models?
2. How does the balance between exports and imports affect the income available to each sector?
3. What role do financial markets play in the five-sector model?
IV. Measuring the GDP
1. What are the three distinct approaches to calculating GDP and why do they theoretically produce the same result?
A. Expenditures Approach
1. What are the four types of spending included in the expenditures approach and what does each represent?
2. How are inventories treated in the investment component of the expenditures approach?
3. What is the difference between residential and public construction investment?
B. The Income Approach
1. What four factors of production are measured in the income approach and how do they contribute to GDP?
C. The Value-Added Approach
1. How does the value-added approach calculate GDP and what is the relationship between output and intermediate goods?
D. Trade and GDP
1. How is production by foreign companies in the United States treated differently from production by U.S. companies abroad in GDP calculations?
Key Terms
gross domestic product (GDP)
circular flow model
gross national product (GNP)
factors of production
product market
resource market
consumption
expenditures approach
income approach
value-added approach