The circular flow model shows that GDP can be calculated by
A) both the expenditure and income methods because aggregate expenditure equals aggregate income.
B) only the expenditure method in which the four components of aggregate expenditure must be measured in the aggregate.
C) both the expenditure and income methods, even though aggregate expenditure is usually less than aggregate income.
D) only the income method in which the four components of aggregate income must be measured separately.

Question

Quizplus · Accepted Answer

The circular flow model shows that goods and services flow from businesses to households in exchange for payments, while income flows from households to businesses in exchange for goods and services. This circular flow of income and expenditure can be used to calculate GDP both through the expenditure method, which measures the total spending on goods and services in the economy, and through the income method, which measures the total income earned by individuals and businesses in the economy. In both methods, aggregate expenditure equals aggregate income, making both approaches valid for calculating GDP.

The Circular Flow Model Shows That GDP Can Be Calculated