Question

1. The economy's income and expenditure The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Markets for Goods and Services Firms Households Markets for Factors of Production Based on this model, households earn income when purchase in markets for factors of production. Suppose Yvette earns $600 per week working as a doctor for the Medical Clinic. She uses $8 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Sean $225 per week to work the cash register. Sean uses $225 to purchase medical services from the Medical Clinic.

Answer 1

In the markets for factors of production, households are seller of factors of production and firms are buyers of factors of production.

So,

Based on this model, households earn income when firms purchase factors in markets for factors of production.

Event 1

Yvette spends $8 to buy a box of aspirin.

Yvette is purchasing a final good (aspirin).

So,

This event occurs in the market for Goods and Services.

Event 2

Yvette earns $600 per week working for the medical clinic.

In this case, medical clinic has hired the Yvette or has purchased the labor (factor of production) of Yvette.

So,

This event occurs in the market for Factors of Production.

Event 3

Sean earns $225 per week working for Pillmart Pharmacy.

In this case, Pillmart Pharmacy has hired the Sean or has purchased the labor (factor of production) of Sean.

So,

This event occurs in the market for Factors of Production.

Flow from firm to a household take two forms -

Flow of goods and services from firms to households.

Flow of factor income from firms to households.

These two scenarios represent a flow from a firm to a household -

1. The aspirin Yvette receives.

2. The $225 per week Sean earns working for Pillmart Pharmacy.

The sum total of expenditure incurred on final goods and services by various sectors of the economy is referred to as Gross Domestic Product.

Hence,

The given statement is True.

Answer 2