National Income and Product Accounts

• National income and product accounts (national accounts) track money flows between different economic sectors.
• The accuracy of a country's national accounts reflects its economic development.

Circular-Flow Diagram

• The circular-flow diagram simplifies the macroeconomy, illustrating money, goods, services, and production factors flow.
• It demonstrates that money flowing into a market/sector equals the money flowing out.
• Transactions occur as physical things flow one way and money flows the opposite way.
• The simplest diagram includes households and firms.
• A household is an individual or group sharing income.
• A firm produces goods/services for sale and employs household members.
• Product markets (markets for goods and services) are where households purchase goods/services from firms.
• Factor markets are where firms buy resources to produce goods/services, such as the labor market.
• Households own and sell production factors to firms, like labor.

Expanded Circular-Flow Diagram

• An expanded circular-flow diagram illustrates the flow of money.
• Consumer spending represents household spending on goods and services, and remains in the model.
• Households own land, labor, and capital (factors of production).
• Households receive rent, wages, and interest payments from firms.
• Income includes profit distributed to shareholders and interest payments on bonds (loans to firms) and occurs in factor markets.
• Taxes, such as income and sales taxes, are a portion of income paid to the government.
• Government transfers are payments to individuals without expecting goods/services in return and households receive such transfers
• Disposable income is the income left after taxes plus government transfers.
• Private savings are portions of household income set aside into financial markets.
• Financial markets involve institutions that buy/sell stocks, bonds, and make loans.
• The government uses tax revenue and borrows funds through government borrowing to purchase goods/services.
• Government borrowing- is the amount of funds borrowed by the government in the financial markets.
• Government purchases of goods and services are total expenditures by federal, state, and local governments.
• Exports are goods/services sold to other countries, generating funds flow into the U.S.
• Imports are goods/services purchased from other countries, leading to a flow of funds out of the U.S.
• Foreign lending and purchases of stock generates funds flow into the U.S.
• Foreign borrowing and stock purchases by Americans leads to funds flow out of the U.S.
• Inventories are stocks of goods and raw materials held to facilitate business operations.

Investment Spending

• Investment spending includes spending on new productive physical capital and inventory changes.

Final vs Intermediate Goods/Services

• Final goods and services are sold to the end-user.
• Intermediate goods and services are inputs into producing final goods/services.

Gross Domestic Product (GDP)

• GDP is the total value of all final goods/services produced in an economy during a period, usually a year.
• There are three ways to calculate GDP: survey firms and add the total value of their production of final goods and services, add up aggregate spending, and to sum the total factor income earned by households from firms in the economy.
• Government statisticians use all three methods to calculate GDP.
• The first method excludes intermediate goods/services to avoid double-counting.
• Value added is the difference between a firm's sales value and its input purchases from other businesses.
• Calculating GDP as aggregate spending avoids double-counting.

Aggregate Spending

• The formula for measuring with all of the categories included is: GDP = C + I + G + X − IM

What GDP Includes

• Domestically produced final goods/services.
• Capital goods.
• New construction of structures.
• Changes to inventories.

What GDP Does Not Include

• Intermediate goods/services.
• Inputs.
• Used goods.
• Financial assets (stocks/bonds).
• Foreign-produced goods/services.