Three Views of How It Works

Circular Flow Diagram

National Income Identity

Aggregate Supply - Aggregate Demand Model

he 1940s when it was above the trend.

To get a better handle on the cyclical movements, the GDP data was converted to annual percentage change. In this diagram the most striking feature is the change that takes palce in 1950. If we look before that period we find that the volatility in output tends to be higher with years in which output increased and decreased by nearly 20 percent - far higher than anything that we see in the post 1950 period.

 

elop a common denominator, a yardstick which can be used to measure all of the countries. The easiest approach to conversion to a 'common yardstick' would be to convert each output figure to dollars by using the exchange rate. For example if GDP per capita in Japan is 2,000,000 yen and at the current exchange rate, a dollar buys 100 yen, then GDP per capita would be $20,000. The rationale for this conversion is that a dollar buys the same amount of goods in the US as in another country, but anyone who has traveled knows that it doesn't. The reason is that the price of many goods, including housing and services such as legal aid and education, can v