Glossary
Circular Flow Model
A diagram illustrating how money, goods, and services move continuously between households and firms in an economy.
Example:
The Circular Flow Model shows how your payment for a new video game eventually becomes income for the game developers.
Consumer Spending (C)
The total spending by households on goods and services, excluding new housing.
Example:
Your purchase of a new pair of sneakers or a streaming service subscription contributes to consumer spending.
Consumers (Households)
Individuals or groups of people who purchase goods and services in the product market and sell their resources (like labor) in the factor market.
Example:
As a consumer, you decide which new smartphone to buy based on your needs and budget.
Expenditures Approach
A method of calculating GDP by summing up all spending on final goods and services in an economy.
Example:
Using the Expenditures Approach, economists add up consumer spending, investment, government spending, and net exports to find GDP.
Factor (Resource) Market
A market where resources such as labor, capital, land, and entrepreneurship are exchanged between households (suppliers) and firms (demanders).
Example:
A company hiring new employees is engaging in the factor market to acquire labor.
Firms (Businesses)
Organizations that produce goods and services, selling them in the product market and buying resources in the factor market.
Example:
A car manufacturing firm buys steel and labor to produce vehicles for sale.
Government Spending (G)
Spending by all levels of government on goods and services, such as infrastructure projects, military equipment, and public employee salaries. It excludes transfer payments.
Example:
The construction of a new highway funded by the state government is an example of government spending.
Gross Domestic Product (GDP)
The total dollar value of all final goods and services produced within a country's borders in one year. It serves as a key measure of economic output and health.
Example:
If the U.S. GDP increases, it generally indicates that the economy is growing and producing more.
Income Approach
A method of calculating GDP by summing up all incomes earned from the production of goods and services in an economy.
Example:
The Income Approach to GDP includes wages, interest, rent, and profits earned by individuals and businesses.
Interest (i)
Income earned from lending capital, such as money deposited in a savings account or loans made to businesses.
Example:
The money you earn from a bond you own is interest.
Intermediate Goods
Goods or services used as inputs in the production of other goods and services. They are not included in GDP to avoid double-counting.
Example:
The steel used to build a car is an intermediate good; only the final car's value is counted in GDP.
Investment Spending (I)
Spending by businesses on new capital goods (like machinery, factories, and tools) and by households on new residential construction. It does not include financial investments like stocks.
Example:
When a company buys a new robot for its assembly line, that's considered investment spending.
Net Exports (Xn)
The value of a country's total exports minus the value of its total imports.
Example:
If a country exports 120 billion, its net exports would be -$20 billion.
Product Market
A market where goods and services produced by firms are bought by households.
Example:
When you go to the grocery store to buy food, you are participating in the product market.
Profits (p)
The income remaining for a business after all costs of production have been deducted from revenues.
Example:
When a company sells its products for more than it cost to produce them, the difference is its profit.
Rents (r)
Income earned from the use of land or property.
Example:
The monthly payment a landlord receives from a tenant for an apartment is rent.
Transfer Payments
Payments made by the government to individuals or groups without any goods or services being received in return. They are not included in GDP.
Example:
Social Security benefits or unemployment checks are examples of transfer payments.
Voluntary Exchange
The act of buyers and sellers freely and willingly engaging in market transactions, where both parties expect to benefit.
Example:
When you buy a coffee, it's a voluntary exchange because you want the coffee and the shop wants your money.
Wages (W)
Income earned by households for providing labor in the factor market.
Example:
The hourly pay you receive from your part-time job is your wage.