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Economic Theory

3. MACROECONOMIC INDICATORS.
EFFICIENCY OF ECONOMY

Content

1. Simple macroeconomic model.
2. Gross Domestic Product and Gross National Product.

3. Measuring National Income (GDP).
4. Real and nominal Gross Domestic Product.
5. GDP and well-being.

Key words: circular flow diagram, Gross Domestic Product, Gross
National Product, real and nominal GDP, per capita GDP.

1. Simple Macroeconomic Model

Circular flow diagram is a diagram that views the economy as
consisting of households and firms interacting in a goods and services
market and a labour market.
The light arrows going in a clockwise direction show that the

households supply the factors of production to the firms, and the firms
produce goods and services for the households. The dark arrows going in a
counter clockwise directions show the money values of the households’

expenditures on the final goods and services, which supplies exactly the
required amount for the firms to pay the factor incomes (wages, rent,
profit) to the household suppliers of those factors (labour, land, capital).
Definition of circular-flow diagram: a visual model of the economy

that shows how dollars flow through markets among households and firms.
This diagram is a very simple model of the economy. Note that it
ignores the roles of government and international trade.

The actual economy is, of course, more complicated than the one
illustrated in Figure 3.1. In particular, households do not spend all of their
income. Households pay some of their income to the government in taxes,

and they save and invest some of their income for use in the future. In
addition, households do not buy all goods and services produced in the
economy. Some goods and services are bought by governments, and some

are bought by firms that plan to use them in the future to produce their
own output. Yet, regardless of whether a household, government, or firm

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