1. What is the relationship shown on the circular flow among income, total expen
ID: 1111870 • Letter: 1
Question
1. What is the relationship shown on the circular flow among income, total expenditure, and GDP?2. “The amount of the new stocks and bonds issued in a year adds to the country’s GDP.” Is this assertion correct or incorrect? Explain your answer?
3. Explain the two approaches, income and expenditure, to calculate GDP?
4. What is the difference between real and nominal GDP, and why do economist make this distinction? 1. What is the relationship shown on the circular flow among income, total expenditure, and GDP?
2. “The amount of the new stocks and bonds issued in a year adds to the country’s GDP.” Is this assertion correct or incorrect? Explain your answer?
3. Explain the two approaches, income and expenditure, to calculate GDP?
4. What is the difference between real and nominal GDP, and why do economist make this distinction?
2. “The amount of the new stocks and bonds issued in a year adds to the country’s GDP.” Is this assertion correct or incorrect? Explain your answer?
3. Explain the two approaches, income and expenditure, to calculate GDP?
4. What is the difference between real and nominal GDP, and why do economist make this distinction?
Explanation / Answer
1.
A circular flow of income explain the flow of income among different sectors such as households and firms. Later on, the government and export / import are also included.
In a circular flow of income, expenditure by one sector becomes the income of one or more sectors.
Hence, at equilibrium, income in the economy = expenditure in the economy = GDP
For example, the households work for the firms as a factor of productions and earn income. Hence, the expenses of the firms include the wages as income earned by the household. Now, the households spend the income upon the goods produced by the firms. Now, the expenditure made by the households becomes the income of the firms.
A GDP is the sum of total income earned in the economy or the total expenditure done in the economy.
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