Circular Flow -- Equivalence of Income, Spending, and Production
Context for Use
In this activity students are asked about three very different macro concepts: income, production, and spending. As economists know, in the circular flow these have equivalent dollar amounts. This activity leads students to this important concept.
Expected Student Learning Outcomes
After mastering this exercise, students will be able to understand a key part of the circular flow -- the equivalence of production, income, and spending. This plays a key role in understanding GDP.
Information Given to Students
The Circular Flow (Microsoft Word 2007 (.docx) 12kB Jul19 18)
It is late summer and you are driving in the country. You stop at a roadside farm stand and buy $10 of fresh corn that a farmer grew on his farm. There are three economic concepts here: 1) the income (or revenue) that the farmer receives for the corn, 2) the market value of the produced corn, and 3) the dollars that you spent on the corn. Thinking about the money values for these three concepts (income, production, and spending) in this case, which of the following is correct?
A. income, production, and spending are all different values
B. income has the same value as production
C. income has the same value as spending
D. production has the same value as spending
E. income, production, and spending all have the same value
Teaching Notes and Tips
For followup, a circular flow diagram would be useful. One would want to be sure to expand this idea across the economy, a further example (like the purchase, production, and income from a burger at a fast food restaurant) might be helpful. Also, the followup should include values of GDP and GDI from FRED to show that they're equal.