Question

In the circular flow diagram,

1)	income and spending in the model are never equal.

2)	the value of the goods and services produced in the economy and income cannot be the same.

3)	the only player is households.

4)	income must always equal spending which equals the value of goods and services produced in the economy.

Answer 1

GDP can be represented by the circular flow diagram as a flow of income going in one direction and expenditures on goods, services, and resources going in the opposite direction. Households buy goods and services from businesses and businesses buy resources from households.

The circular flow diagram illustrates the equivalence of the income approach and expenditures approach to calculating national income.

Individuals purchase goods and services from businesses, and their expenditures (the money they spend) go to businesses. Firms purchases resources, such as labor from households, and the money they pay for these resources go to households.

Hence ( D ) part is a correct answer