Show the components of gdp, Macroeconomics

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Q. Show the components of GDP?

The circular flow - simple version

We have defined GDP, gross domestic product, as the market value of all finished service and goods produced in a country during a specific period of time. We would now look closer at the definition and components of GDP- something that is essential if we want to understand macroeconomics.

In order to better figure out the details of GDP we will use the 'circular flow model'. The main purpose of the circular flow is to demonstrate how goods, services and money flow to and from different sectors in the economy. Such a model can be more or less detailed.    

251_Show the components of GDP.png

Figure

In this model goods (and services) flow counter clock wise while money flows clockwise.

  • Firms deliver finished goods to the goods market (semi-manufactured goods circulate within box firms). Firms are compensated for the goods and this compensation is equal to GDP.
  • Consumers receive goods from the goods market where prices are determined by supply and demand.
  • In order to pay for goods, consumers deliver factors of production (labor and capital) to factor markets.
  • Firms purchase factor so production using income they receive from goods market.

Note that flow of money from firms to the factor markets is exactly the same as flow of money from the goods market to the firms. If this wasn't the case, firms as a group would make a profit or a loss. However since all firms are owned by individuals (indirectly or directly through pension funds and other funds), all losses or profits should ultimately fall on the consumers. This flow is part of the return on capital, a flow of money to the factor market.


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