Please explain the following: Was is the circular flow diagram and how do you fi
ID: 1161236 • Letter: P
Question
Please explain the following:
Was is the circular flow diagram and how do you fit in it. Is it possible some of your colleagues might be represented in more than one way in this diagram?
Explain GDP and how countries with a higher GDP tend to have a higher quality of living. Explain what consumer and producer prices indexes are and how you fit into them?
Do both of them impact your life and Why? Please explain what inflation is and how it touches your life and the lives of you community. If inflation was 3 percent year for ten years, and you did not get a raise during that period what has it done to your real income?
Explanation / Answer
Circular flow diagram is a circular flow model where exchange of money, goods and services are represented across different economic agents such as consumers, producers, government agents etc. Depending on your economic role, you fit in the circular flow diagram in the appropriate category, for example if you consume and dont produce anything but serve as an employee in a production firm, then you would fit in as a receiver of goods and provider of labour. Yes, it is possible to represent one person in more than one form in the diagram as he can perform many roles simultaneously.
GDP is the market value of goods and services produced by a nation in an year. Countries with higher GDP will have higher income and hence higher investments in public resources like eucation, health etc. Hence, countries where people have quality amenities provided to them privately and publicly will raise the level of living. Price indexes are the are the current price levels in the economies, producer price index is the price level of commodities used by producers and consumers price index is the price level of commodities used by consumers
Yes, both of them impact the life of consumers directly and indirectly. If producers experience a rise in the price of commodities that they use for production process, the increase will be shifted to consumers by raising the price of the final cimmodities. Inflation is the increase in the price level, it touches our lives in many ways such as it reduces the value of money, i.e to purchase the same amount of commodities, more money is now required. If inflation was 3% each year and one doesn't get a raise in the income, then the real income would decrease