CH 1.3 : Circular Flow Model
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Questions and Answers

What does GDP stand for in the context of economy?

  • Gross National Income
  • Gross Domestic Product (correct)
  • Global Dollar Price
  • General Development Pace

    • What is a limitation of GDP as an indicator of standard of living?

  • It is only used for small businesses
  • It is only used in developed countries
  • It is not affected by inflation
  • It does not account for the distribution of income among the population (correct)

    • What does GNI measure?

  • Total income earned by foreigners within a country
  • Total income earned from exports
  • Total income earned from producing goods and services within a country
  • Total income earned by a country's nationals, including production inside and outside the country (correct)

    • What is a key difference between GDP and GNI?

    <p>GDP measures income earned within a country, while GNI measures income earned by nationals inside and outside the country</p> Signup and view all the answers

    Why might GDP appear more favorable politically, especially in countries with significant foreign debt or asset sales?

    <p>Because it includes production by foreign entities within the country</p> Signup and view all the answers

    What do both GDP and GNI ignore?

    <p>Non-monetary transactions and informal economic activities</p> Signup and view all the answers

    What is per capita income used for?

    <p>To understand the economic well-being of the average citizen</p> Signup and view all the answers

    How is per capita income calculated?

    <p>By dividing total GDP or GNI by the population</p> Signup and view all the answers

    What does per capita income not address?

    <p>Both income and wealth distribution</p> Signup and view all the answers

    Why do GDP and GNI require adjustments for inflation?

    <p>Because inflation affects the value of money over time</p> Signup and view all the answers

    What is the primary function of households in the circular flow model?

    <p>To provide labor and receive income</p> Signup and view all the answers

    Which of the following is NOT a participant in the circular flow model?

    <p>Non-profit Organizations</p> Signup and view all the answers

    What is the main purpose of the goods market in the circular flow model?

    <p>To exchange goods and services</p> Signup and view all the answers

    What is the term for the movement of goods and services in the circular flow model?

    <p>Real Flow</p> Signup and view all the answers

    What is the formula for calculating GDP using the Expenditure Approach?

    <p>GDP = C + I + G + (X - M)</p> Signup and view all the answers

    What is the primary purpose of the financial institutions in the circular flow model?

    <p>To facilitate savings and provide loans</p> Signup and view all the answers

    What is the term for the total market value of all final goods and services produced within a country's borders in each period?

    <p>Gross Domestic Product (GDP)</p> Signup and view all the answers

    Which of the following is a factor market in the circular flow model?

    <p>Factor Market</p> Signup and view all the answers

    What is the term for the continuous flows in the economy, affecting stock levels of resources and financial assets?

    <p>Production, Income, and Spending</p> Signup and view all the answers

    How many approaches are there to calculate GDP?

    <p>3</p> Signup and view all the answers

    What is the main purpose of businesses in the circular flow model?

    <p>To hire labor and produce goods and services</p> Signup and view all the answers

    What is the term for the movement of money in exchange for goods, services, and labor in the circular flow model?

    <p>Monetary Flow</p> Signup and view all the answers

    Which of the following is an example of a public service provided by the government in the circular flow model?

    <p>Infrastructure such as roads and bridges</p> Signup and view all the answers

    What is the formula for calculating GDP using the Expenditure Approach?

    <p>GDP = C + I + G + (X - M)</p> Signup and view all the answers

    What represents the total market value of all final goods and services produced within a country's borders in each period?

    <p>GDP</p> Signup and view all the answers

    Which of the following is a characteristic of the continuous flows in the economy?

    <p>Affecting stock levels of resources and financial assets</p> Signup and view all the answers

    What is the main purpose of the factor market in the circular flow model?

    <p>To trade factors of production</p> Signup and view all the answers

    Which of the following is an example of a good exchanged in the goods market?

    <p>A car</p> Signup and view all the answers

    What is the term for the participants that engage in trade, affecting imports and exports in the circular flow model?

    <p>Foreign Sector</p> Signup and view all the answers

    What is the relationship between the real flow and the monetary flow in the circular flow model?

    <p>They are two separate but interconnected flows</p> Signup and view all the answers

    What is a major difference between GDP and GNI in terms of geographical scope?

    <p>GDP focuses on production within the country, while GNI focuses on production both inside and outside the country.</p> Signup and view all the answers

    What is a common limitation of both GDP and GNI as indicators of standard of living?

    <p>They do not account for wealth distribution.</p> Signup and view all the answers

    Why might GDP be more favorable politically in certain countries?

    <p>Because it appears more favorable in countries with significant foreign debt or asset sales.</p> Signup and view all the answers

    What is the purpose of calculating per capita income?

    <p>To understand the economic well-being of the average citizen.</p> Signup and view all the answers

    What is a common adjustment required for both GDP and GNI?

    <p>Adjustment for inflation.</p> Signup and view all the answers

    What is the focus of GDP as an indicator of standard of living?

    <p>Total income earned from producing goods and services.</p> Signup and view all the answers

    What does GNI account for that GDP does not?

    <p>Income earned by nationals outside the country.</p> Signup and view all the answers

    What is a limitation of GDP as a measure of standard of living?

    <p>It does not account for the distribution of income among the population.</p> Signup and view all the answers

    What is the primary difference between GDP and GNI in terms of income?

    <p>GDP accounts for income earned from producing goods and services, while GNI accounts for all income earned by nationals.</p> Signup and view all the answers

    What is a common problem with both GDP and GNI?

    <p>They both ignore non-monetary transactions and informal economic activities.</p> Signup and view all the answers

    What is the primary role of the government in the circular flow model?

    <p>To collect taxes and provide public services and infrastructure</p> Signup and view all the answers

    Which market is responsible for the exchange of goods and services?

    <p>Goods Market</p> Signup and view all the answers

    What is the primary difference between the real flow and the monetary flow in the circular flow model?

    <p>The real flow involves the movement of goods and services, while the monetary flow involves the movement of money</p> Signup and view all the answers

    What is the purpose of the financial institutions in the circular flow model?

    <p>To facilitate savings and provide loans</p> Signup and view all the answers

    What is a key characteristic of the continuous flows in the economy?

    <p>They affect stock levels of resources and financial assets</p> Signup and view all the answers

    Which of the following is an example of a factor of production traded in the factor market?

    <p>Land</p> Signup and view all the answers

    What is the relationship between the Product Approach and the Expenditure Approach to calculating GDP?

    <p>They are alternative approaches that should produce the same value for GDP</p> Signup and view all the answers

    What is the purpose of calculating GDP?

    <p>To measure the total market value of all final goods and services produced within a country's borders</p> Signup and view all the answers

    Which participant in the circular flow model is responsible for hiring labor and producing goods and services?

    <p>Businesses</p> Signup and view all the answers

    What is the term for the movement of goods and services in the circular flow model?

    <p>Real Flow</p> Signup and view all the answers

    What is a primary reason why GDP might not accurately reflect a country's standard of living?

    <p>It ignores the distribution of income among the population.</p> Signup and view all the answers

    Which of the following is a key characteristic of GNI?

    <p>It accounts for all income earned by a country's nationals, regardless of where it is earned.</p> Signup and view all the answers

    What is a common limitation of both GDP and GNI?

    <p>They ignore non-monetary transactions and informal economic activities.</p> Signup and view all the answers

    What is the primary purpose of calculating per capita income?

    <p>To understand the economic well-being of the average citizen.</p> Signup and view all the answers

    Why might GNI be a more accurate indicator of a country's standard of living than GDP?

    <p>It measures the total income earned by a country's nationals, regardless of where it is earned.</p> Signup and view all the answers

    What is a limitation of GDP as a measure of standard of living?

    <p>It does not account for wealth distribution.</p> Signup and view all the answers

    What is the primary difference between GDP and GNI in terms of geographical scope?

    <p>GDP measures income earned within the country, while GNI measures income earned outside the country.</p> Signup and view all the answers

    Which of the following is NOT a limitation of both GDP and GNI?

    <p>They account for wealth distribution.</p> Signup and view all the answers

    What is a common adjustment required for both GDP and GNI?

    <p>Adjustment for inflation.</p> Signup and view all the answers

    What is the primary focus of GDP as an indicator of standard of living?

    <p>Production within the country.</p> Signup and view all the answers

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