The GDP and Circular Flow

Which of the following is false about the circular-flow diagram?

• Households are the primary demanders of goods and services.

• Firms are the primary suppliers of goods and services.

• Money flows from households to firms as households offer factors of production for sale.

• Money flows from firms to households as households offer factors of production for sale.

Construction of new homes is considered part of:

• investment spending.

• consumption.

• government spending.

• private saving.

The simplest circular-flow diagram shows an economy that contains two groups:

• Households and Firms

• Payment factors and Spending

Where goods and services are bought and sold?

What's is GDP?

How do you calculate the GDP?

1.     The simplest circular-flow model shows the interaction between households and firms. In this model:

• only barter transactions take place.

• households and firms interact in the market for goods and services, but firms are the only participants in factor markets.

• firms supply goods and services to households, while households supply factors of production to firms.

• attention is focused on ―real‖ flows of goods, services, and factors of production, but money flows between households and firms are ignored for simplicity.