Question

1.   Consider an economy with three goods – wheat, flour and bread. Wheat and flour are intermediate goods (non-durable capital goods) whereas bread is the only consumer good and no inventory of any good is maintained.

i. Assuming wages and profits are the only forms of income, construct an example showing the payments of the producers of the three goods (including inter-producer payments)

ii.Calculate the GDP of this imaginary economy using the product, income and expenditure methods. Explain how these methods deal with the problem of double counting in the calculation of GDP.

2.   Draw, label and explain the circular flow of income and expenditure.

3.   With reference to the circular flow, explain the concept of an equilibrium level of GDP.

Answer 1