Measures of Performance

By: Yassmin Benbouchaib and Darius Smith

The Circular Flow Model

The circular flow model displays the relationship of resources and money between firms and households. Every adult and even most children can understand its basic structure from personal experience. Firms employ workers, who spend their income on goods produced by the firms. This money (income spent by workers which turns into revenue by firms) is then used to compensate the workers and buy raw materials to make the goods. This is the basic structure behind the circular flow diagram.
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Circular Flow of Income and Expenditures

Accounting for Output and Income

value of production

Means to measure the value of goods that are produced, not just the amount of goods produced.

Gross Domestic Product

GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis.

GDP = C + I + G + ( X - M ) = Aggregate spending.

Real and Nominal GDP

  • Nominal GDP: A gross domestic product (GDP) figure that has not been adjusted for inflation.Also known as "current dollar GDP" or "chained dollar GDP."
  • Real GDP: An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constant-price," "inflation-corrected" GDP or "constant dollar GDP"

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Inflation/the Consumer Price Index

The Consumer Price Index (CPI)- measures the average price level of items that consumers actually buy.

Inflation- The annual rate of inflation on goods consumed by the typical consumer is the percentage change in the CPI from one year to the next.

The CPI is based upon a market basket of goods bought by consumers, even those goods that are produced abroad. The GDP deflator includes all items that make up domestic production.

-Because GDP includes more than just consumer goods, the index is a broader measure of inflation, while the CPI is a measure of inflation of only consumer goods.

Consumer price index and inflation rate

Measuring the Unemployment Rate

The non-institutionalized labor force is the sum of all individuals 16 years and older, not in the military or prison, who are either currently employed or unemployed. To be accounted as one of the unemployed, you must be actively looking for work.

  • Labor Force = Employment + Unemployment
  • Unemployment Rate = ( Unemployment / Labor Force ) x 100

-the unemplyment rate is the ratio of unemployed to the total labor force.


What is the size of the labor force?

Total Population: 2,000

Total employed adults: 950

Total unemployed adults: 50

What is the unemployment rate?

Total Population: 2,000

Total employed adults: 950

Total unemployed adults: 50

What type of unemployment defines someone who quits their job and began looking for a new job at a competing grocery store?

A. Cyclical

B. Structural

C. Seasonal

D. Frictional

E. Discouraged


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