warm-up/review what is the difference between gdp/gnp? what are the two methods for measuring each?...

Warm-Up/Review

• What is the difference between GDP/GNP?• What are the two methods for measuring

each?• List the 3 Macroeconomic goals.• What is the main purpose of determining a

countries GDP? GNP?

Circular Flow Model

• The 2nd method for determining a country’s GDP/GNP

• The Circular Flow Model describes and visually shows how the economy interacts with one

another!!!

We begin with the 3 spending sectors!

The three spending sectors are:

Businesses Gov’t Households

RESOURCE MARKET

Where you get your 4 factors

of production to make your goods and services

PRODUCT MARKET

Where you buy your finished

goods and services for use

Businesses Gov’t Households

Resource Market

Product Market

• HOUESHOLDS provide the resource market with the four factors of production.• Land• Labor• Capital • entrepreneurship

• In return, they receive income in the form of:• Rent• Wages• Interest• Profit

Businesses Gov’t Households

Resource Market

Product Market

4 factors of production

R, W, I, & P

• Businesses spend $$$ (costs) in the resource market to get the 4 factors of production to make goods and services.

• In return, businesses receive the land, labor, capital and entrepreneurship to make goods and services.

Businesses Gov’t Households

Resource Market

Product Market

4 factors of production

R, W, I, & P

Resources

Costs

• Businesses make goods and services with their resources and supply it to the product market.

• In return, businesses get revenue for supplying their goods and services.

Businesses Gov’t Households

Resource Market

Product Market

4 factors of production

R, W, I, & P

Resources

Costs

Revenue

Goods and Services

• Households spend money in the product market.

• In return, households get the goods and services they want and need.

Businesses Gov’t Households

Resource Market

Product Market

4 factors of production

R, W, I, & P

Resources

Costs

Revenue

Goods and Services Goods and Services

Consumption

Spending

• The government spends money in the resource market to get the 4 factors of production.

• The government spends money in the product market to buy goods and services.

Businesses Gov’t Households

Resource Market

Product Market

4 factors of production

R, W, I, & P

Resources

Costs

Revenue

Goods and Services Goods and Services

Consumption

Spending

Expenditures

Expenditures

Resources

Goods and Services

• The government provides goods and services to households and businesses. • Police protection• Fire fighters• National defense• Parks• Schools

• In return, households and businesses pays taxes to the government!

Businesses Gov’t Households

Resource Market

Product Market

4 factors of production

R, W, I, & P

Resources

Costs

Revenue

Goods and Services Goods and Services

Consumption

Spending

Expenditures

Expenditures

Resources

Goods and Services

Goods & Services Goods & Services

Taxes Taxes

Review Questions!!!

1. The factors of production are bought and sold in the ___________ market.

2. Goods and services are bought and sold in the ___________ market.

3. In the circular flow model, ____________ buy the factors of production from _______________.

4. In the circular flow model, ______________ buy goods and services from _________________.

5. Households and businesses pay ___________ to the government in exchange for goods and services.

Assignment: Illustrated Circular Flow Diagram

• On a separate sheet of paper, draw an ILLUSTRATED Circular Flow Diagram!!!

• Use the entire paper!!!• Color your Circular Flow Diagram

to help you organize what’s going on!!!

2 Additions ($$) to the Circular Flow Model (Not seen in

the map)

• INVESTMENT

• When businesses invest money in the economy, it pumps extra money into our economy

• EXPORTS

• When foreigners buy American goods, it pumps more money into our economy

2 Leakages to the Circular Flow Model (Not seen in

the map)

• SAVINGS

• Since households don’t spend all of their money, their savings is not money flowing into the economy.

• IMPORTS

• When Americans buy foreign goods, it pumps money out of the U.S. economy.