Firms in the circular flow, Macroeconomics

Assignment Help:

We divide all firms into 3 categories: FR includes all firms which acquire raw material (iron ore, farm products and so on), FH all those that produce semi-manufactured goods (steel, pulp and so on) and FF all firms producing finished goods (software, cars and so on). We use the symbol Y for GDP. All of Y will go to the firms in FF box. Though if we sum the value added from all firms, we would get exactly Y. This is why:

Figure

Goods in the circular flow

394_Firms in the circular flow.png

  • If YR is total value of all goods going from FR to FH, then total value added from all firms in the FR box is equal to YR (they don't purchase any goods to which they add value).
  • similarly if total value of all goods going from FH to FF is given by YH, then total value added from all firms in the FH box is YH - YR.
  • Similarly total value added for all firms in FF box will be equal to Y - YH. If we sum all the value added from all firms then we get YR + (YH - YR) + (Y - YH) = Y.
  • This result is independent of how many 'levels' or boxes we have in the production process. In place of three levels, we could have any number of levels and result would still hold.

Also a particular firm may be producing in many of the boxes. 

Because the value added in every firm is equal to the return to factors of production, total return to the factor market should be equal to the sum of value added from all firms that is equal to Y.

The total return to the factor market = Sum of all value added = GDP

 


Related Discussions:- Firms in the circular flow

Define the monopoly of central banks, Define the monopoly of Central banks ...

Define the monopoly of Central banks The central bank has a monopoly on issuing currency, it is in complete control of the monetary base. In section 7.4.2 we will describe exac

When patulin molds can occur, Occurrence: It is found in a range of foods b...

Occurrence: It is found in a range of foods based on fruits. Presence of patulin in fruit juice is a indication that the juice was extracted from poor quality fruit which is undesi

Way they do at home, 1. Should each person behave in the workplace the way ...

1. Should each person behave in the workplace the way they do at home? Or should each person have a separate set of ethics for each part of their life? 2. What if you are the bo

Assignment, derive the isoprofit functin

derive the isoprofit functin

How central bank increases the target rate, How central bank increases the ...

How central bank increases the target rate Let's say that the central bank increases the target rate. When the target rate increases, the central bank needs to raise the overni

Circular flow model and the supply and demand curves, Write a one paragraph...

Write a one paragraph summary and three paragraphs that take the information in the article and relate it specifically to the circular flow model and the supply and demand curves.

frame work, Hello sir, madam... I am hassan PHD student. I''m lost to get...

Hello sir, madam... I am hassan PHD student. I''m lost to get a good frame work of my thesis about e government and economic growth. and I need to know how to measure the variable

MONETARY POLICY, What are the instruments of monetary policies

What are the instruments of monetary policies

Particular capabilities and resources, The resource based model identifies...

The resource based model identifies four criteria that firms can use to evaluate whether particular resources and capabilities are core competencies and can therefore, provide a ba

Major economic indicators, A. What are the major differences between capita...

A. What are the major differences between capitalism, communism, and socialism? B. Discuss the three major economic indicators and how they are indicative of our current economi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd