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Chapter 8: Q. 1 (page 185)

Explain in your own words why the flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period.

Short Answer

Expert verified

It clearly defines the relationship between the money cycle and gross domestic product and gross domestic product.

Step by step solution

01

Step 1- Introduction

The income and product cycle explains that during the interval, the value of the output is always equal to the income of the factor.

02

Step 2- Explanation

The following figure illustrates this process


03

Step 3- Conclusion

In any economy, businesses produce goods and services, and households buy and consume the goods and services they provide. Companies produce goods from household income (in the form of purchases), and similarly, households purchase goods from household income (in the form of labor).

This means that spending on products created by a company is nothing more than the income a household receives from the company.

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Most popular questions from this chapter

Look back at Table 8-3, which explains how to calculate real GDP in terms of 2009constant dollars. Change the base year to2007. Recalculate the price index, and then recalculate real GDP-that is, express column4of Table 8-3 in terms of 2007dollars instead of 2009dollars.

Consider the diagram below, and answer the following questions.

a. What is the base year? Explain.

b. Has this country experienced inflation or deflation since the base year? How can you tell?

Why do you suppose that there is a positive relationship between nations' tax rates and the relative size of their underground economies?

In Table 8-1, what is the total dollar amount that is added to the nation's gross domestic product? Why?

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?)
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