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Answer Key Macro Topic 2.1 The Circular Flow and GDP PDF

The document is a study guide that provides information about GDP and the circular flow model. It includes questions to test understanding of key concepts like the components of GDP using the expenditure and income approaches. It also provides practice questions to identify whether examples represent different GDP components. Finally, it includes a case study about the production of bread to calculate GDP using value-added and expenditure approaches.

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3K views3 pages

Answer Key Macro Topic 2.1 The Circular Flow and GDP PDF

The document is a study guide that provides information about GDP and the circular flow model. It includes questions to test understanding of key concepts like the components of GDP using the expenditure and income approaches. It also provides practice questions to identify whether examples represent different GDP components. Finally, it includes a case study about the production of bread to calculate GDP using value-added and expenditure approaches.

Uploaded by

jade20090106
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Leah Philip

AP Macro Topic 2.1 The Circular


Flow and GDP
Part 1: Check Your Understanding- Use the word bank below to fill in the blanks on the circular flow
diagram for a closed economy.

Consumption Goods/Services (2) Private Borrowing Public Savings


Government Spending Investment Private Savings Resources (2)
Factor Payments National Income Public Borrowing Revenue
Taxes (2)

1. What are the four components of GDP using the expenditure approach?
Consumer spending, business investment, government spending, and net exports
2. What are the four components of GDP using the income approach?
Wages, rent, interest, and profit (these are called factor payments)

This study source was downloaded by 100000874857581 from CourseHero.com on 01-22-2024 08:27:32 GMT -06:00

https://www.coursehero.com/file/120719397/Answer-Key-Macro-Topic-21-The-Circular-Flow-and-GDPpdfdocx/
3. Explain why both the expenditure approach and income approach yield the same value of GDP.
One person’s spending is another person’s income. If spending increases by $100 then incomes
increase by $100

Video Help: https://goo.gl/nPBBwR

AP Macro Topic 2.1 The Circular


Flow and GDP
4. What are government transfer payments and why are they not included in the calculation of
GDP?
Transfer payments are when the government gives money to households or businesses (example:
welfare). They are not included since doing so would result in double counting.
5. Why are financial transactions not included in the calculation of GDP?
Financial transactions, like the sale and purchase of bonds, are not counted since GDP only includes
the production of new goods/services. Financial transactions don’t count because nothing is
produced Part 2: Practice- Identify if each of the following is an example of consumer spending (C),
investment spending (I), government spending (G), net exports (XN), or not counted in GDP (NC).

6. I A startup tech company buys new computers for its employees

7. C You purchase a candy bar

8. NC The government issues a Social Security check to a retired real estate agent

9. NC The Ford Motor Company buys windshields to put on new cars in production

10. XN An American named Peter Parker buys a necklace in Italy

11. G The military purchases a new tank

12. I Your uncle pays a contractor $600,000 to build a new house

13. XN Ford builds 100 cars in the U.S. that are sold to people in Canada

14. I A motorcycle dealership has 10 brand new motorcycles that go unsold this year

15. NC An attorney offers to help her friend file legal paperwork for free

Part 3: Put It All Together- The table below lists the costs and prices for four businesses involved in
making, distributing, and selling bread. Use the information to answer the questions below.

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Cost of Inputs Price of
Output
Farmer Fred $0 $0.50
Baker Bob $0.50 $1.50
Trucker Tom $1.50 $2.25
Retail Rob $2.25 $3.50

16. Calculate the GDP using value-added approach. Explain how you got your answer.
GDP= $3.50. Add up the difference between the costs for each business and the price at each step of
the production process. $0.50 + $1.00 + $0.75 + $1.25 = $3.50.
17. How much is the GDP using the expenditure approach? How is this process for calculating GDP
different than the value-added approach?
GDP = $3.50. The expenditure approach is based on the value of final goods and the loaf of bread is
sold as a final good to consumers for $3.50

Video Help: https://goo.gl/nPBBwR

This study source was downloaded by 100000874857581 from CourseHero.com on 01-22-2024 08:27:32 GMT -06:00

https://www.coursehero.com/file/120719397/Answer-Key-Macro-Topic-21-The-Circular-Flow-and-GDPpdfdocx/
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