Question

The figure given below is the circular flow diagram of the economy of Argos.

a. Place the numbers below in the appropriate blanks in the diagram below.

Rent	$150		Savings	$200
Wages	600		Government spending	220
Profits	90		Exports	150
Interest	120		Imports	120
Transfer payments	180		Investment	110
Taxes (households only)	340

What are the values of the following? Remember to include a minus sign (-) in front of negative values.

b. Costs of production	$
c. Total factor payments	$
d. Disposable income	$
e. Aggregate expenditures	$
f. Total revenue of all businesses	$
g. Total injections and leakages	Injections: $    Leakages: $	Hint: Use net tax revenue, that is, taxes less transfer payments.
h. Balance of trade (net exports)	$
i. Government budget surplus/deficit	$	Hint: Use net tax revenue.

Answer 1

b) Costs of production = rent + wages + interest + normal profit of entrepreneur

= 150+600-90+ 120 = 780

c) Total factor payments = wages for labour + rent for land + profit for entrepreneur + interest for capital

= 600 + 150 + 90 + 120 = 960

d) Disposable Income = Wages - taxes that households pay = 600-340 = 260

e) Aggregate expenditure = AE = Consumption C + Investment I + Govt spending G + Net Exports NX

Now, if disposable income = 260- savings 200, consumption = 260-200 = 60, Net exports = Exports - Imports = 150-120 = 30

so AE = 60 + 110 + 220 + 30

= 420

g) Injections are those which bring money into economy = govt spending + investment + foreign cash through exports = 220+ 110+ 150 = 480

Leakages are money that is withdrawn from the economy = net taxes (taxes-transfer payments) + money paid due to imports + savings = 340 - 180 + 200 + 120 = 380

h) Balance of trade = net exports = value of countrys exports - value of countrys imports = 150-120 = 30.

i) Govt budget = govt spending - revenue from taxation, here we use net tax revenue = taxes - transfer payments = 340- 180 = 160 , so govt budget = 220-160 = 60 = govt spends mire than its revenue so govt budget deficit.

As per rules we should do first four subparts but I have done more. Thank you.