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Chapter 8: Q.19 (page 187)

Suppose that in Figure 8-1, the sum total of all the goods and services produced during the relevant period-pairs of shoes, candy bars, digital devices, etc., all summed together-is 500 trillion units. The total dollar value of this flow of output is $20 trillion. The total amount of factors of production-labour, land, capital, entrepreneurship, all summed together-is 1 billion units. What is the flow of income-that is, the sum of wages, rents, interest, and profits?

Short Answer

Expert verified

There is a circular flow of income, goods and services in the economy.

Step by step solution

01

Introduction

In circular flow, the families give the variables of creation to delivering the labor and products in the economy thusly they get factor installments. The products created are consumed by families and the organizations get the financial installments.

02

explanation part (1)

In a circular flow, the complete worth of the result is generally equivalent to the pay got the benefits are the piece of the expense of creation. So here the absolute result is$20a trillion so the flow of payments will be consistently$20trillion. In a circular flow, the absolute result is generally equivalent to adding up to pay which is the amount of lease, wages, interest, and benefit.

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Most popular questions from this chapter

Consider the following hypothetical data for the U.S. economy in 2020(all amounts are in trillions of dollars).

a. Based on the data, what is GDP? NDP? NI?

b. Suppose that in 2021, exports fall to \(2.3trillion, imports rise to \)2.85trillion, and gross private domestic investment falls to $3.25trillion. What will GDP be in 2021, assuming that other values do not change between 2020and 2021?

Consider the following table for the economy of a nation whose residents produce four final goods.

Assuming a 2018base year:

a. What is nominal GDP for 2019 and 2020?

b. What is real GDP for 2019and 2020?

If market tuition rates for college courses were used as implicit dollar valuations of "free" Internet courses for inclusion in GDP, what assumption would be adopted in comparing the "free" courses with the tuition-based courses? (Hint: Are online college courses always of equal quality compared with regular college courses?)

Suppose that early in a year, a hurricane hits a town in Florida and destroys a substantial number of homes. A portion of this stock of housing, which had a market value of \(100 million (not including the market value of the land), was uninsured. The owners of the residences spent a total of \)5 million during the rest of the year to pay salvage companies to help them save their remaining belongings. A small percentage of uninsured owners had sufficient resources to spend a total of \(15million during the year to pay construction companies to rebuild their homes. Some were able to devote their own time, the opportunity cost of which was valued at \)3 million, to work on rebuilding their homes. The remaining people, however, chose to sell their land at its market value and abandon the remains of their houses. What was the combined effect of these transactions on GDP for this year? (Hint: Which transactions took place in the markets for final goods and services?) In what ways, if any, does the effect on GDP reflect a loss in welfare for these individuals?

Each year after a regular spring cleaning, Maria spruces up her home a little by retexturing and repainting the walls of one room in her house. In a given year, she spends \(25on magazines to get ideas about wall textures and paint shades, \)45on newly produced texturing materials and tools, \(35on new paintbrushes and other painting equipment, and \)175on newly produced paint. Normally, she preps the walls, a service that a professional walltexturing specialist would charge \(200to do, and applies two coats of paint, a service that a painter would charge \)350to do, on her own.

a. When she purchases her usual set of materials and does all the work on her home by herself in a given spring, how much does Maria's annual spring texturing and painting activity contribute to GDP?

b. Suppose that Maria hurt her back this year and is recovering from surgery. Her surgeon has instructed her not to do any texturing work, but he has given her the go-ahead to paint a room as long as she is cautious. Thus, she buys all the equipment required to both texture and paint a room. She hires someone else to do the texturing work but does the painting herself. How much would her spring painting activity add to GDP?

c. As a follow-up to part (b), suppose that as soon as Maria bends down to dip her brush into the paint, she realizes that painting will be too hard on her back after all. She decides to hire someone else to do all the work using the materials she has already purchased. In this case, how much will her spring painting activity contribute to GDP?
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