1 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. Markets for Goods and Services Firms Households Markets for Factors of Production Based on this model, households earn income whenpurchase in markets for factors of production. Suppose Caroline earns $650 per week working as a doctor for the Medical Clinic. She uses $10 to order a mojito cocktail at Little Havana. Little Havana pays Antonio $350 per week to wait tables. Antonio uses $175 to purchase medical services from the Medical Clinic.

Solution

Based on this model, households earn income when firms purchases input in markets for factor of production.

- Caroline earns $650 per week working for the Medical Clinic

This event occur in the Market for Factor of Production. It is so because here Caroline earns factor payment of $650 per week from providing her services or labor to the the Medical Clinic.

- Antonio spends $175to purchase medical services from medical council. This event occur in the Market of goods and services because here Antonio spends $175 on purchase of services of medical council.

- Antonio earns $350 per week.... This event occurs in Market of Factor of Production because here Antonio provides his services or labor to Little Havana and earns factor payment of $350.

The scenerio represents flow from household to firms are -

- Caroline\'s labor : It is the flow of labor or factor services from household to firms. In other others it is flow of input from household to firms.

- The $175 Antonio spends to purchase medical services from Medical Clinic : It is the flow of consumption expenditure on services from household to firms. In other words it is flow of dollar from household to firms.

The $350 per week Antonio earns working for Little Hawara is represent the flow of dollar from firms to household as it is the factor payment (wages) which is given by firms to household.

**true or false**

It is false that GDP cannot be used to measure the economy\'s income. It is so because GDP measures the value of total output produced in an economy, it means the total income that is generated from the production is measured by GDP so it is one of the best measure to find the economy\'s income.

That\'s why the statement is false.