Question

1. The economy's income and expenditure

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.

  

Based on this model, households earn income when   purchase   in markets for factors of production.

Suppose Eleanor earns $625 per week working as a jewelry appraiser for Classy's Jewelry Store. She uses $9 to have breakfast at Dinah's Diner. Dinah's Diner pays Darnell $325 per week to work as a short-order cook. Darnell uses $100 to purchase a necklace from Classy's Jewelry Store.

Identify whether each of the following events in this scenario occurs in the market for factors of production or the market for goods and services.

Event	Market for Factors of Production	Market for Goods and Services
Eleanor earns $625 per week working for Classy's Jewelry Store.
Darnell spends $100 to purchase a necklace from Classy's Jewelry Store.
Darnell earns $325 per week working for Dinah's Diner.

Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply.

The $325 per week Darnell earns working for Dinah's Diner

The $100 Darnell spends to purchase a necklace from Classy's Jewelry Store

The breakfast Eleanor receives

True or False: Gross domestic product (GDP) measures total expenditures on final goods and services during a given period of time.

Answer 1

Events in Market for factors of production (like labour, capital market):-

• Eleanor earns $625 per week working as a jewelry appraiser for Classy's Jewelry Store.
• Dinah's Diner pays Darnell $325 per week to work as a short-order cook.

Events in Market for goods and services (like food, jwellery or any consumable):-

• Eleanor uses $9 to have breakfast at Dinah's Diner.
• Darnell uses $100 to purchase a necklace from Classy's Jewelry Store

The scenario that represent a flow from a firm to a household:-

• Eleanor earns $625 per week working as a jewelry appraiser for Classy's Jewelry Store(The $625 flows from jewelery store (firm) to Eleano (household)).
• Darnell earns $325 per week working for Dinah's Diner ($325 flows from Dinah's Diner (firm) to Darnell (household)).

The other two event of Eleanor getting breakfast and Darnell buying necklace are flows from household to firm.

True, GDP is equal to all expenditure on final goods and services. Its equivalent to total product and income of the nation which also equal to GDP. The notion is that total output in a nation is sold. Consumer spend money on those goods (expenditure). Finally the producers recieve those expenditures as incomes.