Circular Flow Model

The circular flow model can help us to understand the two approaches used to measure GDP

1. expenditures approach
2. income approach

Arrow # 3 is real GDP. This is output produced by business and sold in the product markets.

To measure this we can measure arrow #4 which are the expenditures spent on this output.

We can also measure arrow #1 which is the income earned by households when they sell their resources (arrow #2) to businesses.

GDP = C + I + G + Xn

Income Approach --calculating national income (NI)

1. circular flow: expenditures = income?

NI = Wages + Rents + Interest + Corp. Profits + Prop. Income

2. resource payments

a. compensation of employees (wages)

b. rent
c. interest
d. profit

1) proprietor's income
2) corporate profits

3. National Income to GDP

NI + IBT + Depreciation (CCA) = GDP

a. indirect business taxes (IBT)
b. depreciation

4. Other Social Accounts

a. net domestic product (NDP)

GDP - Depreciation (CCA) = NDP

b. national income (NI)

NI = Wages + Rents + Interest + Corp. Profits + Prop. Income