Question

Summarize

​(1) circular flow model

​(2) substitutes and complements

​(3) consumer surplus and producer surplus

​(4) GDP's 4 methods

​(5) CPI's problems

​(6) Loanable funds market

​(7) unemployment rate and employment ratio

​(8) human capital and physical capital

​(9) productivity promotion policies

​(10) limits to growth

​(11) demand's cross price elasticity

​(12) labor force participation rate

Answer 1

(1) The circular flow model to show the relationship of flow of good & service and income between government households and producers. The chart gives a clear picture where the government plays the main role in the circular flow of income, good, and service.

( 2) Complementary good : Two goods are complementary if one good use as input for other good. It means both good depend on each other if one good demand increase than other demand goes up. for example, software, and computer

Substitute good: Two goods are substitutes if one good replaces the other good. if one demand increase than other demand goes down. for example, Pepsi Cola and Coca Cola are substitutes.

(3) Consumer surplus: consumers surplus is the area between the consumer pays and willing to pay for a good.

Producer surplus: Producer surplus is the area between the price a firm receives and the minimum price at this the firm willing to sell.

( 4 ) To measure the national income of a country, we use three different methods, such as – (a) The product method – (b) The income method – (c) The expenditure method

(a) the product method

GDPf = P1Q1 + P2Q2+ P3Q3…. + PnQn

Where

Pi = price of the final good i

Qi = output of final good i

n = number of goods and services produced in the economy •

Identification of product units

1. Primary Sector – Agricultural, Forestry, Fishing, Mining

2. Secondary Sector – Manufacturing Sector

3. Tertiary Sector – This sector is also called service sector – Banking, Insurance, etc.,

GDPMP = 1+2+3+Net Indirect Taxes+ Depreciation

(b)  The income method

Factor income from all the three sectors are added

GDP_MP=Compensation of employees + Rent + Interest+ Profits + Mixed Income of self employed + NIT + Depreciation

Where Compensation of employees are Wage and salaries in cash, compensation, and pension

( c)  The expenditure method

Classification of final expenditure.

1. Private final consumption expenditure

2.Govt. final consumption expenditure

3. Gross fixed capital formation

4. Change in stocks

5. Net Exports

GDPM = C + I + G + NX

or

GDPMP = PFCE + GFFCE + GFCF + Change in Stocks + Net Exports

( 5) CPI's Problems

1. It does not measure The cost of public goods and services
2. It does not measure the Impact of quality change of good
3. It does not include the cost.
4. it does not take when new goods are introduced
5. The CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive.
6. It takes time to include new goods into account and eliminate the old goods which consumers have stopped using.

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