Homework Sourse1 The economys income and expenditure The following diagram
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 firms/households purchase goods and services/labor and capital in markets for factors of production.
Suppose Maria earns $900 per week working as a corporate attorney for Rowan and Martin Associates. She uses $8 to have breakfast at Dinah\'s Diner. Dinah\'s Diner pays Kevin $425 per week to work as a short-order cook. Kevin uses $325 to purchase legal service from Rowan and Martin Associates.
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
Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.
Maria\'s labor
The $425 per week Kevin earns working for Dinah\'s Diner
The $325 Kevin spends to purchase legal service from Rowan and Martin Associates
True or False: Gross domestic product (GDP) cannot be used to measure the economy’s income.
True
False
| Event | Market for Factors of Production | Market for Goods and Services | |
|---|---|---|---|
| Maria earns $900 per week working for Rowan and Martin Associates. | |||
| Kevin spends $325 to purchase legal service from Rowan and Martin Associates. | |||
| Maria spends $8 to have breakfast. |
Solution
Which of the elements of this scenario represent a flow from a household to a firm?
Maria\'s labor - this is flow from Household to Firm
The $425 per week Kevin earns working for Dinah\'s Diner - flow from Firm to Household
The $325 Kevin spends to purchase legal service from Rowan and Martin Associates - flow from Household to Firm.
Gross domestic product (GDP) cannot be used to measure the economy’s income. - False
GDP is defined as the market value of all final goods ans services produced within a country in a given period of time.
GDP measures the total income of everyone in the economy and total expenditure on the economy\'s output of goods and services.
Thus, GDP can be used to measure the economy\'s income.
| Market for factors of Production | Market for factors of goods and services | |
|---|---|---|
| Maria earns $900 per week working for Rowan and Martin Associates. | $900 | |
| Kevin spends $325 to purchase legal service from Rowan and Martin Associates. | $325 | |
| Maria spends $8 to have breakfast. | $8 |
