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EEB Project
Components of real GDP; the circularflow of income; the role of governmentand international trade; aggregatedemand and aggregate supply
By:Robin KapoorSourabh GargDeepak KumarSanjay PalSakshi JoshiVikas Sharma Tushar GargPankaj JainPrateek NaharNitin RahejaSection: Finance, F12
 
EEB Project
Real GDP
 Real GDP – Definition
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Real GDP is a macroeconomic measure of the size of an economy adjusted for  price changes and inflation. Real GDP measures the output of final goods andservices produced and incomes earned at constant prices.
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Real GDP = [(Nominal GDP)/ (GDP deflator)] x 100
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Real GDPfor a given year is the given year's nominal GDP stated in the based- year  price level.Real GDP growth on an annual basis is the nominal and abnormalGDP growth rate adjusted for inflation and expressed as a percentage.
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Because Real GDP is adjusted for changes in prices and inflation throughout theyear, it can be thought of in terms of 'purchasing power.'
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Real GDP per Capita reflects GDP purchasing power of each individual in theeconomy.
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Real GDP per capita is found by dividing real GDP by the size of the population.
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Unlike nominal GDP, real GDP can account for changes in the price level,and provide a more accurate figure. Let's consider an example. Say in 2004,nominal GDP is $200 billion. However, due to an increase in the level of pricesfrom 2000 (the base year) to 2004, real GDP is actually $170 billion. The lower real GDP reflects the price changes while nominal does not.
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By eliminating the effect of price changes, real GDP allows economists to makeuseful comparisons of a nation's output and services. Note that real GDP is alsoknown as constant-price GDP and inflation-corrected GDP.
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GDP is the sum of consumer spending, investment, government purchases, and netexports, as represented by the equation:Y = C + I + G + NXBecause in this equation Y captures every segment of the national economy, Y represents both GDP and the national income. This because when money changes hands, it isexpenditure for one party and income for the other, and Y, capturing all these values, thusrepresents the net of the entire economy.
Finance, F122
 
EEB Project
Components of GDP 
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Consumer spending , C, is the sum of expenditures by households on durablegoods, nondurable goods, and services. Examples include clothing, food, andhealth care.
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Investment , I, is the sum of expenditures on capital equipment, inventories, andstructures. Examples include machinery, unsold products, and housing.
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Government spending , G, is the sum of expenditures by all government bodies ongoods and services. Examples include naval ships and salaries to governmentemployees.
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 Net exports , NX, equal the difference between spending on domestic goods byforeigners and spending on foreign goods by domestic residents. In other words,net exports describe the difference between exports and imports.
Circular flow of income
Ineconomics, the term circular flow of income or circular flow refers to a simpleeconomic model which describes the reciprocal circulation of income between producersand consumers. In the circular flow model, the inter-dependent entities of producer andconsumer are referred to as "firms" and "households" respectively and provide each other with factors in order to facilitate the flow of income. Firms provide consumers with goodsand services in exchange for consumer expenditure and "factors of production" fromhouseholds.The circle of money flowing through the economy is as follows: total income is spent(with the exception of "leakages" such as consumer saving), while that expenditure allowsthe sale of goods and services, which in turn allows the payment of income (such as wagesand salaries). Expenditure based on borrowings and existing wealth – i.e., "injections"such as fixed investment – can add to total spending.Inequilibrium(Preston), leakages equal injections and the circular flow stays the samesize. If injections exceed leakages, the circular flow grows (i.e., there is economic prosperity), while if they are less than leakages, the circular flow shrinks (i.e., there is arecession).
Two Sector Model 
In the simple two sector circular flow of income model the state of equilibrium is definedas a situation in which there is no tendency for the levels of income (Y), expenditure (E)and output (O) to change, that is:Y = E = O
Finance, F123
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