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------------------------------------------------- Page 124 Check Your Understanding 3. Describe the circular flow diagram. Why must all income equal spending in the economy? The circular flow diagram is a representation of how businesses and households network amongst one another through the product and resource markets. Households supply labor to the resource market. In turn, businesses use this labor to produce goods and services that are provided to the product market. Overall, products will soon be purchased back by consumers and returning to households. The clockwise arrow is to show the movement of real items such as, hours worked and so on. The counterclockwise arrow is to show the movement of money. The reason that…show more content…
In other words, GDP only counts current production costs. 5. List the four components of GDP. Give an example of each. The list of four components of GDP would be: consumption: such as the purchase of a novel or book investment: such as the purchase of an computer government: purchases, such as an order for military weapons net exports: such as Canada purchasing gasoline from other countries. ------------------------------------------------- Page 510 – con’t 6. Why do economists use real GDP rather than nominal GDP to gauge economic well-being? With nominal GDP also including increase in output caused by price changes, it is not comparable year to year. When inflation is removed or having real GDP computed, economists can see the overall changes that are made in economy concerning goods and services. ------------------------------------------------- Page 510 – con’t 7. In the year 2010, the economy produces 100 loaves of bread that sell at $2 each. In the year 2011, the economy produces 200 loaves of bread that sells at $3 each. Calculate nominal GDP, Calculate the real GDP and the GDP deflator for each year. (Use 2010 as the base year.) By what percentage does each of these three statistics rise from one year to the next? ii. The percentage change in nominal GDP is (600 − 200) /200 x 100 = 200%. The percentage change in real GDP is (400 − 200) /200 x 100 = 100%. The percentage change in the
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