Exercise 4

Analyze using examples The Circular-Flow Diagram.

FIRMS

Revenue

(= GDP)

Goods

and services

sold

Factors of

production

Wages, rent,

and profit

(= GDP)

MARKETS FOR

GOODS AND

SERVICES

MARKETS FOR

FACTORS OF

PRODUCTION

Spending

(= GDP)

Goods and

services

bought

HOUSEHOLDS

Labor, land,

and capital

Income (= GDP)

Figure 1: Mankiw, N.G., 2017. Principles of macroeconomics. Boston: Cengage Learning.

= Flow of inputs

and outputs

= Flow of dollars

(25 marks)