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The Circular Flow and GDP

AP Macro - 2.1AP Micro - 2.1

The circular flow model shows how households and firms exchange money and goods. GDP measures total output using the expenditure approach: C + I + G + (X - M).

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The Circular Flow Model

Key Concepts to Understand

Question 1 of 3

In the factor market, which of the following is true?

Households purchase goods and services from firms.

Firms provide goods and services to households.

Households supply labor and other resources to firms.

Firms pay taxes to the government.

Practice Questions: Test Your Understanding

Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.

Question 1 of 3

An economy produces only apples and bananas. In one year, 100 apples are sold at $1 each, and 50 bananas are sold at $2 each. Nominal GDP for that year is:

Key Takeaways

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Circular flow: Households supply factors of production and buy goods; firms use factors and sell goods; money and goods flow in opposite directions.
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GDP (expenditure): C + I + G + (X - M) — consumption, investment, government spending, net exports.
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GDP measures the market value of all final goods and services produced in a country in a period; avoid double-counting intermediate goods.