The Circular Flow Model: Linking Output, Income, and Expenditure

GDP Calculation in a Simple Shirt Economy

Analytical Utility of the Output-Expenditure-Income Equivalence

In a simple economy, a logging company cuts down trees and sells the raw timber to a furniture maker for $500. The furniture maker then crafts a dining table from this timber and sells it to a retail store for $1,200. Finally, the retail store sells the dining table to a family for $1,500. Based on these transactions, what is the total value contributed to this economy's aggregate output?

Calculating GDP via the Income Approach

In a simplified economy consisting only of households and firms, a firm produces $100,000 worth of consumer goods in a year. In that same year, the firm sells $90,000 worth of these goods to households. The remaining $10,000 worth of goods are not sold and are added to the firm's inventory. Why does the total expenditure in this economy still equal the total output of $100,000?

Reconciling Economic Measures