Circular Flow of Income in Economics

Answer 1
Part a
The circular flow of income is a neoclassical economic model depicting how
money flows through the economy. Money usually flows from the business firms
to the households as factor payments which are wages, interest rent as well as
profits. On the other hand, the money flows from the households to firms as the
consumption expenditure which are made by the households on the services and
goods produced by the firms. Therefore, it can be stated that the money flows
from the business firms to households as factor payments and then after that is
similar way it flows from households to firms. In this way it can be said that the
value of business output of goods and services is equal to the income of the
households.
Part b

The question says that the nominal gross domestic product of the country has
increased from $1620 billion in 2017 to $1680 billion in 2018. This however does
not mean that the growth of country has increased by 3.7 percent. The reason is
that the nominal gross domestic product does not take into account the inflation
adjustment in the economy. The nominal gross domestic product is generally
higher than the real gross domestic product. The economic growth of the country
should always be measured with the help of real GDP except nominal GDP.
Therefore, it can be said that the country did not grew by 3.7 percent from 2017
to 2018.
Answer 2
The economic growth generally takes place when there is an outward shift of the production
possibility curve in the economy. The growth of the economy is generally measured by the
increase in the total output or gross domestic product it has been found out that most of the
developed economies are known to experience slower economic growth compared to the other
developing countries in the world. The main determinants of the economic growth are the
advancement in technology, accumulation of capital stock, investment in human capital and also
rise in labor inputs in the economy.
Advancement in the technology: one of the most important factor is the technology
improvement. Technology can help in improving productivity with the similar level of output
which accelerates growth as well as development in the economy. Advancement in the
technology helps in producing large amount of goods at a much lower price. Technology is most
likely to lead to a sustained long run growth.

Rise in labor inputs: rise in population also means that there is an increase in the availability of
workers as well as employees that also means a high workforce in the economy. Large amount of
labor force means that the workforce that will be producing more amount of goods in the
economy.
Accumulation in capital stock: rise in the investment in the human capital can help in improving
the labor force quality of the economy. This will also improve the skills, training and ability of
the labors. A skilled labor force has a significant effect on growth since skilled workers are more
productive.
However, the policies of Federal government include:
Lower taxes to support growth: this policy will help in economic growth since, when taxes will
be lowered people will be having more money in hand to spend. Lower taxes mean rise in the
disposable income of the people. When people will have more in hand to spend and consume, the
consumption increases which also means the gross domestic –product of the country will
increase.
Building a smart economy by investing in science and technology: when investments are made in
technology and science, it can be stated that investing in science and technology will help in
advancement of the technology. When technology advances in the economy, the cost of
production will also declares as advanced technology makes work easier.
Backing our farmers: backing the farmers will lead to economic growth since they are the sole
food producer in the economy. Therefore, the government should be backing the farmers since
they are the only producers of food which is a large part of the gross domestic output.

The economic growth generally takes place when there is an outward shift of the production
possibility curve in the economy. The growth of the economy is generally measured by the
increase in the total output or gross domestic product it have been found out that most of the
developed economies are known to experience slower economic growth compared to the other
developing countries in the world. The main determinants of the economic growth are the
advancement in technology, accumulation of capital stock, investment in human capital and also
rise in labour inputs in the economy.
Advancement in the technology: one of the most important factor is the technology
improvement. Technology can help in improving productivity with the similar level of output
which accelerates growth as well as development in the economy. Advancement in the
technology helps in producing large amount of goods at a much lower price. Technology is most
likely to lead to a sustained long run growth
Answer 3
Unemployment is the situation in the economy where the able bodied people who are in search
of job cannot find their job in the economy. On the other hand, underemployment is the situation
of underuse of workers due to the jobs which underutilizes the skills of the workers or might the
leave the worker idle.
With the present situation in the economy, both unemployment and underemployment have
become a quite a common phenomena in the economy. Underemployment is mainly caused by a