Question 1

What is the circular flow diagram?

Accepted Answer

A graphical representation of how goods, services, and money flow through the economy between firms and consumers

Question 2

What are the two markets in the circular flow diagram?

Accepted Answer

The factor/resource market: where factors of production (resources) are exchanged

The product market: where economic goods/services (products) are exchanged

Question 3

Who are the two actors in the circular flow diagram?

Accepted Answer

Firms: businesses and other corporations (supply goods/services, demand inputs/resources)

Consumers: individual people (supply inputs/resources, demand goods/services)

Question 4

Who supplies and demands in the resource market?

Accepted Answer

Firms demand resources (e.g., hiring workers)

Consumers supply resources (e.g., by working for firms)

Question 5

Who supplies and demands in the product market?

Accepted Answer

Consumers demand goods/services (e.g., buying a laptop)

Firms supply goods/services (e.g., a firm making a laptop)

Question 6

What is voluntary exchange?

Accepted Answer

A transaction where people trade freely without being forced to

Question 7

What is GDP?

Accepted Answer

The dollar value of all final goods and services produced within a country within a year

(measures final production within a country's borders)

Question 8

What are some uses of GDP?

Accepted Answer

Compare countries

See the impact of policy changes

Compare growth since previous yearsthe

Question 9

How do you calculate GDP with the expenditures approach?

Accepted Answer

Consumption + Business Investment + Govt. Spending + (Exports - Imports)

Question 10

What is consumer spending?

Accepted Answer

The value of goods/services purchased by consumers

(a new iPhone, haircut, or toothbrush)

Question 11

What is investment spending?

Accepted Answer

Any spending done by businesses

(money spent on tools; not a stock market investment)

Question 12

What is government spending?

Accepted Answer

Any spending by the government?

(military equipment, building highways, etc.; not welfare)

Question 13

What is net export?

Accepted Answer

The value of goods/services exported minus the value of goods/services imported

(exporting 100 pounds of iron ore minus importing 50 pounds of wheat)

Question 14

What are intermediate goods?

Accepted Answer

Goods used to produce a final good

(e.g., sugar; not counted in GDP!)

Question 15

What are non-production transactions?

Accepted Answer

Financial transactions that do not involve the production of a good/service

(social security, gifts, personal investments; not counted in GDP!)

Question 16

What isn't included in GDP?

Accepted Answer

Intermediate goods

Non-production transactions

Illegal or non-market activities

Question 17

What are non-market activities?

Accepted Answer

Goods or services that are created or done but do not receive payment

(making a cake for your friend's birthday, fixing your own car)

Question 18

What is the income approach to calculating GDP?

Accepted Answer

Add up all the income earned from selling all final goods and services produced in a given year

Question 19

What is the value-added approach to calculating GDP?

Accepted Answer

Add up the dollar value added at each stage of the production process

2.1 Circular Flow & GDP, AP Macroeconomics Flashcards