Posted: September 10th, 2015

Relationship between production, income and expenditure.

 
a) Draw a diagram of a simple model (two-sector) of the Circular Flow of Income, and describe the relationship between Households and Firms in the economy. Explain the relationship between production, income and expenditure.
b) Draw another diagram and use it to explain what happens to the model when we include the Financial sector, Government sector and the Overseas sector. As you add each sector to the model, be sure to briefly clarify what leakages and injections to the flow should be identified, and how these affect the size of the economy. What is the criterion for equilibrium in the economy?
Question 2

a) Define the term Gross Domestic Product or GDP. Explain the difference between GDP at current prices (nominal GDP) and GDP at constant prices (real GDP).
Discuss why GDP is not a good indicator of economic welfare, particularly when measured over time or across nations? Briefly describe what the Genuine Progress Indicator (GPI) is, and explain why economists agree that the GPI can give us a more accurate picture of the economic well-being of a nation. List at least five reasons for each measure.
b) Go to any website familiar to you and provide data on real GDP for Australia and China or India, from 2005 to 2011 (5 years). Present this in a table.
Compare and contrast the situation in both countries, using the GDP data obtained. Has there been any increase in GDP (economic growth) in any of the two countries? Calculate the percentage changes in the real GDP and include in your table. Graph the economic growth rates for both countries. Use a line graph for each country.
Are we able to conclude which country is better off by comparing this data only? Explain in detail. (Hint: discuss real GDP per capital. Provide data on the real GDP per capita for both countries from the website for the same period and compare and contrast the data obtained).

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