Circular Flow Diagram

Circular Flow diagram also called the circular flow model is perhaps the simplest diagram in economics to understand the activity in the economy.

The circular flow model shows,firstly the relationship between households and firms,and secondly how they interact with one another in two markets,namely,in goods and services market and the factor of production market. Continue reading

Gross Domestic Product

To measure the economic performance of an economy,the first measure is the Gross Domestic Product or GDP in short. It is an important economic statistic/data because it provides the best estimate of the market value of all final goods and services produced by an economy in one year. It is usually used to measure and compare economic outputs of various countries around the world. It allows us to compare the total output level of one country to the total output level of another country with ease.

GDP is measured in monetary value or cash value of all final goods and services produced in a year . GDP measures two things at once- the total income of everyone in the economy and the total expenditure on economy’s output of goods and services. A higher GDP means more output from an economy and typically a stronger economy.  Continue reading

Measuring a Nation’s Income

To measure how much output, spending and income has been generated in a given time period, we use National Income Accounts. These accounts measure three things:

1. Output

2. Spending

3. Income

Before computing the National Income the meaning of term ‘National Income’ should be taken up

National Income

National Income is the money value of final flow of output of goods & services produced within an economy over a period of time, usually one year and net income earned from abroad

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of the final goods & services produced within the domestic territorial limits of country over a period of time (1 year).

‘Market Value’ GDP uses market price as it reflects the value of goods. Higher the price higher is the contribution to GDP.

‘Of all’ GDP tries to be comprehensive. It includes all items produced in the economy and sold legally in the market.

‘Final’ GDP includes only the value of final goods and not intermediate goods as it is already included in the price of the final goods. Avoids double counting.

‘Goods and services’ GDP includes tangible goods (cars, clothing etc.) and intangible services (haircut, doctor’s visit etc)

‘Produced’ GDP includes goods and services currently produced and it does not include transaction involving items produced in the past.

‘Within a country’ GDP measures the value of production within the geographic territorial confines of a country, regardless of the nationality of the producer.

‘In a given period of time’ GDP measures the value of production that takes place within a specific interval of time, usually quarterly (3 months) and yearly. Continue reading