Calculating Economic Growth and Real Values

Step 1 Review

You will find the circular flow becomes more complex as leakages and injections are added as well as the role of government.

Questions to ponder:

1) What occurs in the product market as well as the factor market?

2) What would happen of senior managers of big companies decided they were going to

significantly reduce the wages or income they would pay for a given job. How would

significantly lower wages affect the circular flow of money?

3) Keeping in mind what are deemed to be leakages (savings, imports, and taxes) what

would happen of the leakages increased significantly?

Step 2 Draw Draw a model of the following scenario similar to Figure 3.3 on page 100 in the economic textbook.

Imagine you are a time traveller and you enter a small medieval village and find your way to the only inn. The innkeeper rents rooms for $10 a week, which you pay, as that is the exact amount of money you brought. The innkeeper promptly goes across the street and buys a new pair of shoes (which were just being finished) from the cobbler for $10. Later the same day, the cobbler purchases a new bridle and a set of horseshoes (just produced) from the stable master for, again, $10. Right at the end of the day the stable master buys a years supply of candles (freshly produced) from the candle maker for, of course, $10. These are the only economic transactions in the whole village on that particular day.

Measure the total expenditures, total income earned, and total value of production for that day. What stock of money was used to generate this income flow?

Step 3 Engage Answers the following questions, as they relate to the model you drew:

What were the total expenditures? What was the total income earned? And finally, what stock of money was used to generate this income flow?

What is the relationship between production, expenditures, and income?

What comes first: production or expenditure? And is it conceivable, for instance, to have

income and production, but no expenditures?