According to the circular flow model, how is the GDP of a nation determined?

Choose 1 answer:
(A) By adding the total revenues of firms to the total expenditures of households
(B) By adding the total income of households to the total expenditures by households and the total revenues of firms
(C) By adding the total income of households to the total revenues of firms

D By adding the total expenditures of households to the total income of households
(E) By determining either total household income, total household expenditures, or the total revenues of all the firms in the nation

Question

According to the circular flow model, how is the GDP of a nation determined?

Choose 1 answer:
(A) By adding the total revenues of firms to the total expenditures of households
(B) By adding the total income of households to the total expenditures by households and the total revenues of firms
(C) By adding the total income of households to the total revenues of firms

D By adding the total expenditures of households to the total income of households
(E) By determining either total household income, total household expenditures, or the total revenues of all the firms in the nation

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ To understand how the GDP of a nation is determined according to the circular flow model, we need to recall that GDP can be measured in three ways: the production (or output or value added) approach, the income approach, and the expenditure approach. ‖ ‖ step 2 ⋮ The income approach sums the incomes generated by production in the economy: wages for labor, profits for capital owners, rents for land, and taxes minus subsidies on production and imports. ‖ ‖ step 3 ⋮ The circular flow model suggests that the total income of households (which includes wages, rents, interests, and profits) and the total revenues of firms (from selling goods and services) are equivalent, as every dollar of expenditure by households is a dollar of revenue for firms. ‖ ‖ step 4 ⋮ Therefore, the GDP of a nation can be determined by adding the total income of households to the total revenues of firms, as they should be equal in the circular flow model. This corresponds to option (C). ‖ ∻Answer∻ ***C*** ∻Key Concept∻ ⚹GDP determination using the income approach in the circular flow model⚹ ∻Explanation∻ ⚹The GDP of a nation is determined by adding the total income of households to the total revenues of firms, reflecting the flow of money in the economy.⚹◊What are the key components in the circular flow model that are used to determine a nation's GDP?⍭ Generate me a similar question◊

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