Question

1. Thoroughly explain the 4 components of GDP and relate those components to the Circular Flow model with government and international trade.

Answer 1

THE FOUR COMPONENTS GDP ARE

GDP = HOUSE HOLD CONSUMPTION + INVESTMENT BY FIRMS + GOVERNMENT SPENDING ON GOODS AND SERVICES + NET EXPORTS ( EXPORTS - IMPORTS )

CIRCULAR FLOW MODEL WITH GOVERNMENT AND INTERNATIONAL TRADE IS THE ADVANCED VERSION OF OF ITs KIND.IT DEPICTS THE RELATION BETWEEN ALL PARTIES INVOLVED ,ie , HOUSEHOLDS ,FIRMS ,FACTORS MARKET,GOVERMENT,FOREIGN TRADE , GOODS AND SERVICES MARKET.

FOR THIS CIRCULAR FLOW TO BE IN EQUILIBRIUM , TOTAL SPENDING MUST BE EQUAL TO THE TOTAL INCOME REDCEIVED FROM ALL PLAYERS OF THE ECONOMY.

1. HOUSEHOLD CONSUMPTION INDICATES THE TOTAL PRICE VALUE OF GOODS AND SERVICES CONSUMED BY ALL THE HOUSEHOLDS IN AN ECONOMY.THEY SPEND THEIR DISPOSABLE INCOME FOR BUYING THESE ITEMS .THE CASH AND GOODS TRANSFER FROM MARKET (GOODS AND SERVICES MARKET ) .

2. FIRMS GET PROFIT FROM THE TRADE AND THEY MAKE INVESTMENTS IN THE MARKET SO THAT THEY GET AGIN BENIFITED OUT OF DOING THIS .BUT FIRMS HAS TO PAY CERATIN PERCENT OF THEIR PROFITS IN THE FORM OF CORPORATE TAX TO THE GOVERMENT.

3. GOVERNMENT ALSO SPEND MONEY BUYING GOODS AND SERVICES AND ALSO INTERACTS WITH ALL OTHER PARTIES OF THE ECONOMY.GOVERMENT SPENDING CAN BE FOR HIRING FACTORS MARKET COMPONENTS ( RAW MATERIALS ,LABOURS ,OTER THINGS REQUIRED FOR PRODUCTION ) .GOVERMENT MAKE PAYMENT TOWARS ITs EMPLOYEES IN FACTOR MARKET , IT INTURN REACH HOUSEHOLDS AND THE CYCLE COMPLETES AS HOUSEHOLDS USE THIS MONEY AGAIN TO PURCHASE GOODS AND SERVICES.

4. NET EXPORTS IMPLIES TOTAL TRADE VALUE FROM FORIGN TRADE.IN THIS GLOBALISED WORLD ( RUNNING OPEN ECONOMY WHICH ALLOWS TO TRADE WITH OTHER COUNTRIES IN THE WORLD ) FOREIGN TRADE IS PRACTICED BY ALL LIBERAL ECONOMIES.THE REVENUES OF PRODUCTS EXPORTS AGAIN SHARED BY FIRMS AND GOVERNMENT (TOWARDS EXPORTS DUTY ) . SIMILARLY REVENUES FROM IMPORTED PRODUCTS ARE SHARED BY THE FIRMS IN THE COUNTRY FROM WHICH THE PRODUCTS ARE IMPORTED AND THE GOVERMENT (TOWARDS CUSTOMS DUTY).THUS AGIN THE CYCLE COMPLES WITH THE INCLUSION OF A PARTY OUTSIDE THE COUNTRY.

HOPE IT'S ALL CLEAR