The Circular Flow Model and Gross Domestic

ProductHow Much Did Your Country Produce Last Year?

Simple Circular Flow DiagramNOTE--There are only two actors in this simple model:1. Households, and2. Firms

• What do Households provide to Firms?

• What do Firms provide to Households?

Expanded Circular Flow DiagramNOTE--There are four actors in this model:1. Households,2. Firms,3. Government, and4. the Rest of the World.

• Each of these actors contributes to Gross Domestic Product (GDP).

• What flows into GDP (look at the black arrow) in the diagram?

Gross Domestic Product DefinedGDP: How much “stuff” did our country’s economy produce this year?

GDP = C + I + G + X – IM

C = Consumer spending (by households)

I = Investment spending (by firms)

G = Government purchases

X = Exports (sold by domestic firms to the rest of the world)

IM = Imports (purchased by domestic consumers from the rest of the world)