Question

1a. Gross Domestic Product measures two things simultaneously; total income through employment and total expenditures on an economy’s outputs. Explain how each of these must be equal for an economy to operate. What happens if either measurement becomes restricted? Does this mean that money must be equally available to everyone? Explain. Your explanation should include a description of the GDP equation and a properly labeled Circular Flow Diagram with each line correctly labeled.

1b. What are the dangers of economic growth expanding too rapidly in the economy? What is the distinction between when these trade-offs are acceptable, and when they will create future economic problems? Your explanation should be supported with the Aggregate Supply and Demand Curve.

Answer 1

GDP through income method measures  the income earned (wages, rents, interest, profits) from the production of goods and services while GDP through expenditure method measures the money spent on buying final goods and services . Both have similar approaches but different starting points . Total income through employment of labor , capital , land , entrepreneurship ( wage , interest , rent and profit ) is the money received by the household sector . This same income is used to buy goods and services produced by firms in the market . So to be in balance input should be equal to output . Restriction in measurements arises discrepancy . Money must be divided among all the factors of production used , if not equally but according to their employment ratio .

Y = C + I + G + (X - M) is the standard equational (expenditure) representation of GDP. ( Symbols have their usual meaning Consumption , Investment , Government expenditure , Net exports )

Income = wages + rent + interest + profit + adjustments ( Indirect taxes minus subsidies + Depreciation )

The following diagram makes the idea more clear :