Unit 2: Measuring Economic Performance and Output

Circular Flow Model

A diagram illustrating the flow of money, resources, goods, and services between different economic sectors.

Households

Economic agents that own the factors of production and consume goods and services.

Firms

Producers of goods and services who purchase resources for production.

Resource Market

The market where households sell resources, primarily labor, to firms.

Product Market

The market where firms sell finished goods and services to households.

Real Flow

The physical movement of resources from households to firms and goods from firms to households.

Monetary Flow

The movement of money where firms pay incomes to households, and households pay for goods and services.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country during a specific time period.

Market Value

The use of dollar prices to aggregate various goods into a single number for economic measurement.

Final Goods

Goods sold to the end user, excluding intermediate goods to avoid double counting.

Expenditure Approach

A method to calculate GDP by summing all spending on final goods and services.

Consumption (C)

Spending by households, typically the largest component of GDP.

Gross Private Domestic Investment (I)

Spending by businesses on capital stock, residential housing, and changes in inventory.

Government Spending (G)

Public sector spending on goods and services that contribute to GDP.

Net Exports (N_x)

Exports minus imports, calculated as N_x = X - M.

Intermediate Goods

Goods used in the production of other goods, excluded from GDP calculation.

Non-Production Transactions

Financial exchanges that do not generate new output, such as used goods sales or transfer payments.

Real GDP

The value of current production adjusted for inflation, providing a better measure of economic growth.

Nominal GDP

The value of current production at current prices, not adjusted for inflation.

GDP Deflator

An index that measures the average level of prices for all goods/services in GDP.

Economic Growth Rate

The logical percentage change in Real GDP from one year to the next.

Transfer Payments

Government payments made without receiving goods or services in return, excluded from GDP.

Non-Market Activities

Work done freely that is not included in GDP, such as household chores or DIY repairs.

The Underground Economy

Illegal economic activities and unreported cash transactions not accounted in GDP.

Leisure Time

An aspect of wellbeing that GDP ignores, even if it reflects high production.

Income Inequality

The distribution of income among individuals, which GDP does not address.

Environmental Costs

Negative impacts of production, like pollution, ignored in GDP measures.

Product Quality

Improvements in technology and product quality that may not be captured by GDP.