![]() ![]() The production of goods and services thus generates income to households we see this income as the flow from firms to households labeled “Factor incomes” in the exhibit.įigure 6.1 Personal Consumption in the Circular Flow These factors are ultimately owned by households. (We will add the other components of GDP to the circular flow as we discuss them.) Spending for these goods flows from households to firms it is the arrow labeled “Personal consumption.” Firms produce these goods and services using factors of production: labor, capital, and natural resources. Figure 6.1 “Personal Consumption in the Circular Flow” presents a circular flow model for an economy that produces only personal consumption goods and services. In the chapter on demand and supply, we saw how this demand could be presented in a circular flow model of the economy. Personal consumption represents a demand for goods and services placed on firms by households. In a later chapter we will explore these determinants and the impact of consumption on economic activity. Because consumption is such a large part of GDP, economists seeking to understand the determinants of GDP must pay special attention to the determinants of consumption. The production of consumer goods and services accounts for about 70% of total output. Purchases by households of groceries, health-care services, clothing, and automobiles-all are counted as consumption. Personal consumption is a flow variable that measures the value of goods and services purchased by households during a time period. It is helpful to have instead a single number that measures total output in the economy that number is GDP. So-what kind of year is the year we are looking at? We would not get very far trying to wade through a list of all the goods and services produced that year. A list of all the goods and services an economy produces in any year would be virtually endless. A pediatric nurse in Los Angeles delivers hundreds of babies and takes care of several hundred additional patients. A university football team draws more than half a million fans to its home games. A small logging company in Colorado produces a couple million board feet of lumber. The United States Steel Corporation, the nation’s largest steel company, produces tens of millions of tons of steel. For example, Domino’s Pizza produces hundreds of millions of pizzas.
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