Question

Explain the function of the goods and services market and the factors of production market in the Circular Flow Model. Explain both real and money flows and the role of prices in both the product and factor markets.

Using an example, explain why the production possibilities frontier is bowed outward. Use the production possibilities frontier to explain fully economic growth, efficiency, and inefficiency.

Suppose that China can use cheaper labour to produce every product more cheaply than Canada. Explain why Canada will still gain from international trade with China.

Answer 1

The product flow between the households and the firms is called Circular Flow Model.This has been described as movement of Money and Products.

Real Flow is the exchange of Goods and Services between Household. Money Flow is Monetory Exchange between these two sectors.

1. In real flow household sector supplies raw material,land,capital and enterprise to firms in return firms sector provides finished goods and services to the household sector, Where as in Money Flow , firm sector gives remuneration in form of money to household sector as wages and salaries ,rent ,interest etc.

2. Difficulties of barter system for exchange of goods and factor services between household and firms sector in real flow, where as no such difficulty or inconvenience arise in money flow.

IN FACTOR MARKETS price is determined by the interaction of supply and demand, Firms attempt to maximize profits and factors can influence and change the quilibirium price and quantities bought and sold and thus the laws of supply and demand hold.

The usual Production Possibilities Frontier is BOWED OUTWARD because some resources are more suited to production of one good than another (the law of increasing opportunity cost) INDIA being an AGRICULTURAL ECONOMY is the highest producer of sugar cane and wheat . JAPAN is known for its Technological expertise etc

The Production Possibilities Frontier assumes that all inputs are used efficiently, Factors such as labor,capital and tecnology, among others ,will affect the resources available,which will dictate where the production possibility frontier lies. This is why it is also called as TRANSFORMATION CURVE

In China use of Cheaper Labor to produce every product than Canada is still gainful for Canada because in Canada Cost of Labour is TOO HIGH with in comparison will make the cost of product as very high to afford. Thus by use of chinese cheap labor the products can be used via international trade and between China and Canada.