Question

​​​​​​​The textbook is “Macroeconomics”, 13edition, by Roger Arnold

• How can a country “today” consume the consumer goods at point B without having the sufficient ability to produce at point B?

• Different points of production on your PPF/PPC will affect future economic growth. Why?

• Show and label an example of economic growth on your graph.

• Draw below a two sector circular flow diagram, properly labeling the parts. You may consult your notes, but don’t just copy it from your notes. I want you to put thought into how it is constructed and understand the mechanics of how it works. It is a model of the fundamental inner workings of a simple economy.

Answer 1

1.

Country can specialize in the production of that goods in that, they have comparative advantage. Afterwards, they will trade of some quantity of goods with another country to get a consumption bundle that is outside of the PPF curve at point B.

2.

Different points of production shows that the country is producing more of capital goods or more of consumption goods. It tells the future growth of the country. If capital goods are produced more, then country will grow fast. But, production of consumption goods will make slow economic growth.

3.

4.

In two sector model, the two sectors are households and firms. Households create a market of factor resources and firms create a market of goods and services. Firms buy factors in the market of factor resources and pay wages (income) to the households. Once the goods & services are produced, then households buy it in the market and they do expenditure that becomes the income for the firms. It is the way, two sector model works and circular flow of income takes place.