Eco. 102—-SD/20/08/2021 (Online Discussion Quiz 1—GDP Computation and Circular Flow of Income and Product)

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Eco. 102—-SD/20/08/2021 (Online Discussion Quiz 1—GDP Computation and Circular Flow of Income and Product)
Tony Orji by Tony Orji August 21, 2021Reading Time: 1 min read
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1. What are the differences between Macroeconomics and Microeconomics?

2. Discuss the three different ways of computing GDP

3. Without Diagrams, clearly discuss the circular flow of income and product in a 2-sector economy, 3-Sector Economy and 4-Sector Economy

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Comments 21
AGBO LOVETH AMARACHI 5 months ago
AGBO LOVETH AMARACHI
REG NO: 2018/248 680
DEPARTMENT: EDUCATION ECONOMICS
EMAIL: lovethamarachi84@gmail.com
ECO 391 quiz 1
Research could be seen as a studios inquiry or examination; especially: investigation or experimentation aimed at the discovery and interpretation of facts, revision of accepted theories or laws in the light of new facts, or practical application of such new or revised theories or laws.
QUESTION:
In view of the above assertion and in the light of other definition offered by various research pundits, clearly and clinically analyse the above statement and also let us know what research means to you as the Special Adviser to Mr. President on Research and strategy!

MY view:
Research could be seen as a studious inquiry or examination because it involves a careful study or examination of an observed phenomenon. It deals with investigation or experimentation of facts as it has to do with the investigation or testing (experimentation) of facts or observed phenomenon using a set of systematic procedure which include :
1. Identification of a problem: for researcher to conduct a research, he must first identify a problem. In otherwords, if a problem is not identified, research will not take place. For example, a researcher can identify low level of foreign investors in Nigeria as an economic problem and decide to embark on research to know the possible cause and effect of it to Nigerian economy. Shortcomings or critics of existing economic theories can also be identified as a problem by a researcher which can make him to conduct a research.
2. Choice of topic: when a problem has been identified, a researcher chooses a topic which will be used to embark on research to find answers to the identified problem For instance, if a researcher identified low level of foreign investors in Nigeria, he can choose ‘The causes and effect of low level of foreign investors in Nigeria’ as a research topic .
3. Literature review: This has to do with reviewing or careful study of what other researchers has done on a research topic to know what they have contributed to knowledge of the research topic and shortcomings of their findings. A researcher takes this step to Know area to be focused on his research topic in order to contribute to knowledge gained that will be documented for that particular economic problem. Literature review is very important, it helps a researcher to avoid repeating exactly what another researcher has done without any contribution for improvement or addition of new idea on the topic.
4. Formulation of Hypothesis: This means the formulation of a statement that will stand testing and can be accepted or rejected at the end of a research process.
5. Data collection and Analysis: This refers to collection of data on the topic of research and analysis of such data to either accept or reject the hypothesis formulated thereby proffering solution to an identified problem.
A researcher takes the above procedures to revise accepted theories or laws either to come up with new facts or to improve the existing theories or laws and to analyse how such new facts or revised theories can be practically applied in real world situation.

WHAT RESEARCH MEANS TO ME AS A SPECIAL ADVISER TO MR. PRESIDENT
Research means a systematic study of an observed phenomenon with a view of testing a hypothesis formulated based on observed fact through collection of data and analysis to accept or reject the hypothesis in order to find solution or answer to a problem. In other words, research is a systematic study of an observed phenomenon to come up with new knowledge or to improve an existing knowledge. It is scientific and has peculiar features of being empirical, replicable, systematic, theoretical (based on economic theories), cumulative and lacks moral undertone.

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Tony Orji 5 months ago
You have not submitted this assignment well, so no score for you until you submit it under Eco. 391 column on this blog assignment/quiz. Do you understand?

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Ezeobollo chioma obianuju.Reg no:2019/SD/37742 5 months ago
( Question 1)Macro economics is the study of the behavior of the aggregate economy while micro economics is the study of house holds, firms and individuals behaviour in an economy. 2) GDP means gross domestic product.it is one of the indicators used in measuring the healthiness of a countries economic well being and the standard of living of individuals in that particular economy. This is the value of the final goods and services produced in an economy in a given period. GDP is divided into two,Real GDP is a GDP that has been adjusted for the effect of increase in price(inflation).while Norminal GDP has not been adjusted for increase in price and it is not good in measuring economic well being. We have 3 approaches of calculating GDP i)Expenditure method: this calculate GDP by summing up the value of final goods and services purchased in the economy. It sums up the expenses involved in production of goods and services.Y =C+I+G+Nx where Nx=(x-m). ii)Income approach: this method calculates the income generated within the boarders of a country in a specific year. It adds up wages, rents,interest and profit. iii)value added approach: this GDP calculation involves adding up of all the value added at various stages of production. It takes cognisance of the raw materials which was combined at a particular production to arrive at a given price. (3) Circular flow of income in a 2 sector economy: this is made up of only Households and firms and it is assumed that all households spend their incomes on consumer goods as soon as the income is received.all consumption is assumed to take place in the house holds, and it means that the business sector does not consume finished goods.on the other hand,it’s assumed that all production is done by firms and the firms sell their entire out put to consumers as soon as it is produced. ii)3 sector economy: this comprises the government, house holds and firms.the government purchases goods just as households and firms does.The government spend money on capital goods,infrastructure and health care and they recieves taxes from households and firms and deposits excess of their income to the financial market.households receives wages and salaries from government, receives factor payments from firms,pay taxes to the government,pays consumption expenditures on goods and services to the firms and make savings in the financial market while firms receives interest on government purchase of goods and services, borrows money from the financial market for investments and pays factor payment to the households. iii)4 sector economy models studies the circular flow of income in an open economy which comprises the foreign sector,government. Business sector and households. The foreign sector receives income from the business sector in return for goods and services imported. They make payment to business sector from where imports has been made, if exports exceeds imports,the economy has a balance of payment surplus but if reverse, then balance of payment will be deficit. The government sources of income includes taxes by households, firms and foreign sector, interests and dividend for investment made.they make payments to different sectors inform of transfer payment,subsidies, grants etc. It pays to the firms in return for for goods purchased, name transfer payment like pension funds,scholarship etc to households. If the government receipts are greater than expenses, the surplus goes to the financial market but in case of deficit, they borrow from financial market to maintain a balance in the economy.the households receives factor income inform of rent,wages,interest and profit from business sector. It also recieves transfer payment from government. The income of households flows into business sector, government and financial market in form of consumption expenditures, taxes and savings. The principle receipts of business sector are income from sale of goods and services, income from exports, subsidies from government and borrowing from financial market.

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Chukwuma Lilian Chioma 5 months ago
Name: Chukwuma Lilian Chioma
Reg no: 2019/SD/37731
Dept: Education Economic
Eco 102 quiz 1

(1) The difference between microeconomics and macroeconomics:
(a). Microeconomics on the other hand is the study of the economic acts of the individual and firm. It is the study af particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities etc.
But macroeconomics deals with the aggregate of these quantities not with individual incomes but with national income, not with the individual prices but the general price levels, not with the individual output, but with the national output.
(b). Microeconomics deals with the division of total output among industries, products, firms and the allocation of resources among completing uses. It considers the problem of income distribution, with its interest on relative of particular goods and services. While the brother macroeconomics concerns itself with such variables as aggregate volume of the output of the economy, the extent of which resources are employed, the size of the national income and the general price levels.
(c). Microeconomics sums or aggregates at the sectoral or individual levels (households, firms etc). While macroeconomics uses the aggregate together as they affect the national economy as a whole.

(2). The three different ways of computing GDP are:
(a). Income method: The income method starts with the income earned from the production of goods and services. Under income method we calculate the income earned by all the factors of production in an economy.
(b). Expenditure method: This begins with money spent on goods and services. This measured the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country.
(c). Output method: This measures the monetary or market value of all the goods and services produced within the borders of the country.

(3). The circular Flow of income and products in a 2-sector economy, 3-sector economy and 4-sector economy;
(a). The 2-sector economy:
The 2-sector economy is a simple economy, which is made up of only the households and firms. It is a two-sector economy with no government. In this type of economy, it is assumed that the households spend all their income on consumer goods as soon as that income is received. All consumption is assumed to take place in the households. This means that the business sector does not consume finished goods. On the other hand, it is assumed that all production is done by firms and that the firms sell all their entire output to consumers as soon as it is produced.
(b). The 3-sector economy:
The three-sector economy is when the government enters the circular flow of income. There are now two new channels along which funds can flow from households to product markets. First, governments take in revenue from taxes they Levy on households. Some of that revenue is immediately returned to households in the form of transfer payments. The difference between what governments collect as tax revenue and what is they payout as transfer payments is called net secondly Funds thus flow from households to government as net taxes and then from government to product markets as government purchases of goods and services exceed net taxes, government may borrow the difference from the public through financial markets.
(c). The 4-sector economy:
The four- sector economy is the addition of foreign sector in the circular flow of income. In this sector it shows that some of the expenditures made by consumers, firms and governments do not flow to domestic product markets but instead flow to foreign countries to pay for imports of goods and services.

MICHAEL NKECHINYERE AGATHA
REG. NO.: 2019/SD/37705
QUESTIONS
1) What are the difference between macroeconomic and microeconomics?
2) Discuss the three different ways of computing GDP.
3) Without diagrams, clearly discuss the circular flow of income and product in a 2 – sector economy, 3 – sector economy and 4 – sector economy.

Micro-economics refers to the branch of economics which deals with smaller units or components of the economics. It is concerned with the analysis of basic decision making components of households, individuals, firma and governments. It relates to cost, output, production, pricing and marketing activities of households, firms and governments. Microeconomics focuses on firms and individuals.
Macro-economics refers to the branch of economics which deals with larger units or aggregate of the economy. Macro-economic relates to large aggregates such as national income; inflation, unemployment, balance of payment etc. Macro economics focuses on the sum total of economics activity, dealing with the issues of growth, inflation and unemployment.
 
Differences between Micro-Economics and Macro-Economics
S/N Micro-Economics Macro-Economics
1 involves supply and demand in individual markets monetary/fiscal policy. e.g. what effect does interest rates have on the whole economy.
2 involves individual consumer behaviour e.g. consumer choice theory reasons for inflation and unemployment.
3 individual labour markets e.g. demand for labour wage determination economic growth
4 externalities arising from production and consumption e.g. externalities international trade and globalisation

Formula to Calculate G.D.P
GDP is Gross Domestic product and is indicator to measure the economic health of a country. The formular to calculate GDP is of three types which include:
 Expenditure Approach;
 Income approach, and
 production approach
Expenditure Approach: There are three main groups of expenditure household, business and government. By adding all expenses, we get below equation.
GDP = C + I + G + NX
Where
C = All private consumption/consumer spending in the economy. It includes durable goods, nondurable goods and services
I = All of a country’s investment in capital equipment, housing etc.
G = All of the country’s government spending. It includes the salaries of a government employee, construction, maintenance, etc.
NX = Net country export – Net country import.
This can also be written as:
GDP = Consumption + Investment + government spending + Net export
Income Approach: The income approach is a way for calculation of GDP by total income generated by goods and services.
GDP = Total National Income + sales taxes + Depreciation + Net foreign factor income.
Where – Total national income = sum of rent, salaries profit.
Sales Taxes – Tax. Imposed by a government on sales of goods and services.
Depreciation – The decrease in the value of an asset.
Net foreign factor income – Income earn by a foreign factor like the amount of foreign company or foreign person earn from the country and it is also the difference between a country citizen and country earn.

Production or Value Added Approach:
From the name, it is clear that value is added at the time of production. It is also known as the reverse of the expenditure approach. To estimate the gross value – added total cost of economic output is reduced by the cost of intermediate goods that are used for the production of the facial goods.
Gross value added = Gross value of output – value of intermediate consumption.
GDP Formular
Expenditure Approach = C + I + G + NX
Income Approach = Total National Income + Sales taxes + Depreciation + Net foreign factor income.
Value Added Approach = Grosses value of output – Value of intermediate consumption.
CIRCULAR INCOME FLOW IN A TWO SECTOR ECONOMY
Real flow of resources, goods and services such as land, capital and entrepreneurial ability flow from households to business firms. Money flow from business firms to the households as factor payments such as wages, rent, interest and profits.
Money flows from households to firms as consumption expenditure made by the households on the goods and services produced by the firms, while the flow of goods and services is in opposite direction from business firms to households.
IN THREE SECTOR ECONOMY WITH GOVERNMENT
Government affects the economy in a number of ways, such as its taxing, spending and borrowing roles. Government purchase goods and services just as households and firms do. Government expenditure takes many forms including spending on capital goods and infrastructure (highways, power, communication), on defence goods, and on education and public health etc. These add to the money flows. Government expenditure may be financed through taxes, out of assets or by borrowing. The money flow households and business firms to the government. This money flow includes all the tax payments made by households less transfer payments received from the government. Transfer payments are treated as negative tax payment.
INCOME FLOWS IN FOUR SECTOR OPEN ECONOMY ADDING FOREIGN SECTOR
This includes the foreign sector which reveals to us the transaction of the domestic economy with foreign countries. Foreigners interact with the domestic firms and households through exports and imports of goods and services as well as through borrowing and lending operations through financial market.
CIRCULAR FLOW OF PRODUCT
Product flow is the distribution channel that is viewed as a unified system of interdependent organizations which intermediaries work together to build values as products proceed through the channel to the consumer. It includes movement of goods from supplier to consumer (internal as well as external), as well as dealing with customer service needs such as input materials or consumables or services like housekeeping.

ABAMUCHE LINDA C.
REG. NO.: 2019/SD/37674
QUESTIONS
1) What are the difference between macroeconomic and microeconomics?
2) Discuss the three different ways of computing GDP.
3) Without diagrams, clearly discuss the circular flow of income and product in a 2 – sector economy, 3 – sector economy and 4 – sector economy.
Macroeconomics is the branch of economics dealing with the performance, structure, behaviour and decision making of an economy as a whole. For example, using interest rates, taxes and the government spending to regulate an economy’s growth and stability. While micro economics is a branch of economics that studies the behaviour of individual unit such as households, individuals and enterprises within the economy.
Differences between Macro Economics and Micro Economics
S/N Macro economics Micro economics
1 Macro economics is the study of the whole economy Micro economics is the study of particular market
2 it loose at aggregate variables such as aggregate demand national output It looks at issues such as consumer behaviour, individual labour markets and the theory of firm.
3 macro economics is complex due to the study of large group micro economics analysis is simple
4 problems related to whole economy like employment public finance national income are included in its scope law related to marginal analysis are included in its scope.
5 it provides the information relating to national income, total output, total consumption and general price level it provides the information relating to the individual prices, individual consumption and production.

2. DISCUSS THE THREE DIFFERENT WAYS OF COMPUTING GDP.
1. Expenditure approach
2. Income approach
3. Output approach
1) Expenditure approach: This is the most widely used approach for estimating GDP, which is a measure of the economy’s output produced within a country’s borders irrespective of who owns the means of production. The GDP under this method is calculated by summing up all of the expenditures made on final goods and services.
2) Income Approach: This method comprise of the income generated from the basic factors of production or is been calculated by adding up all the factor incomes to the factors of production in the society, which includes land, labour, capital entrepreneurship or organisation. The production unit are divided into different sectors, income is calculated for each sector and summed up to arrive at net domestic product.
3) The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces. Because of the complication of the multiple stages in the production of a good or service, only the final value of a goods or services is included in the total output.

CIRCULAR FLOW IN A SIMPLE 2 – SECTOR ECONOMY
2 – sectors flow in circular economy flow in its basic form, looking at a simple economy which is made up of only households and firms. This is a two sector economy with no government. The factors owns (households) in turn spend all of their income on goods which leads to a circular flow of income and also it is assumed that all production is done by firms and the firms sell all their entire output to consumer as soon as it produced.
3 – SECTOR (CIRCULAR WITH SAVING AND INVESTMENT)
In the flow diagram, the clockwise arrows showing the flow of goods and services have been removed just to simplify the diagram, they are new 2 parts ways along which expenditures travel on their way from household to product market. Some household income is use for consumption expenditure and reaches the product market directly; other household income is directed to savings.

4 – SECTOR FLOW WITH GOVERNMENT
They are now 2 new channels along which funds can flows from households to product market. The government take in revenue from taxes they made from household, some of the revenue immediately returns to the household in form of transfer payment. Funds flow household to government as net taxes and then from government to product market as government purchase.

UNIVERSITY OF NIGERIA, NSUKKA
FACULTY OF EDUCATION
DEPARTMENT ECONOMICS EDUCATION

AN ASSIGNMENT SUBMITTED IN PARTIAL FULFILLMENT FOR THE COURSE: ECO 102 (MICROECONOMICS THEORY II)

BY
UGWU CHIZOBA OGOCHUKWU
2019/SD/37698

LECTURER: DR. TONY ORJI

AUGUST, 2021

1. WHAT ARE THE DIFFERENCE BETWEEN MICRO AND MACRO ECONOMICS
Macroeconomics is the study of the performance, structure, behavior and decision-making of an economy as a whole. Macroeconomists focus on the national, regional, and global scales. For most macroeconomists, the purpose of this discipline is to maximize national income and provide national economic growth. Economists hope that this growth translates to increased utility and an improved standard of living for the economy’s participants. While there are variations between the objectives of different national and international entities, most follow the ones detailed below:
WHILE
Microeconomics deals with the economic interactions of a specific person, a single entity, or a company. These interactions, which mainly are buying and selling goods, occur in markets. Therefore, microeconomics is the study of markets. The two key elements of this economic science are the interaction between supply and demand and scarcity of goods.

KEY DIFFIERENCE BETWEEN MICRO AND MACRO ECONOMICS
The key difference between microeconomics and macroeconomics is that;
 Microeconomics focuses on individual markets, while macroeconomics focuses on whole economies. Similarly, micro deals with individual and household expenditure while macro deals with the aggregate national expenditure

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2. DISCUSS THREE DIFFERENT WAYS OF COMPUTING GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period.[2][3] GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore, using a basis of GDP per capita at purchasing power parity (PPP) may be more useful when comparing living standards between nations, while nominal GDP is more useful comparing national economies on the international market.[4] Total GDP can also be broken down into the contribution of each industry or sector of the economy.[5] The ratio of GDP to the total population of the region is the per capita GDP and the same is called Mean Standard of Living.
GDP can be determined via three primary methods. All three methods should yield the same figure when correctly calculated. These three approaches are often termed the
1. The Output (or production) approach,
2. The income approach, and
3. Expenditure approach
Production approach
Also known as the Value Added Approach, it calculates how much value is contributed at each stage of production.
This approach mirrors the OECD definition given above.
1. Estimate the gross value of domestic output out of the many various economic activities;
2. Determine the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services.
3. Deduct intermediate consumption from gross value to obtain the gross value added.
Gross value added = gross value of output – value of intermediate consumption.
Value of output = value of the total sales of goods and services plus value of changes in the inventory.
The sum of the gross value added in the various economic activities is known as “GDP at factor cost”.
GDP at factor cost plus indirect taxes less subsidies on products = “GDP at producer price”.
For measuring output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the output of each sector is calculated by any of the following two methods:
1. By multiplying the output of each sector by their respective market price and adding them together
2. By collecting data on gross sales and inventories from the records of companies and adding them together
The value of output of all sectors is then added to get the gross value of output at factor cost. Subtracting each sector’s intermediate consumption from gross output value gives the GVA (=GDP) at factor cost. Adding indirect tax minus subsidies to GVA (GDP) at factor cost gives the “GVA (GDP) at producer prices”.
Income approach
The second way of estimating GDP is to use “the sum of primary incomes distributed by resident producer units”.[6]
If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI should provide the same amount as the expenditure method described later. By definition, GDI is equal to GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.
This method measures GDP by adding incomes that firms pay households for factors of production they hire – wages for labour, interest for capital, rent for land and profits for entrepreneurship.
The US “National Income and Expenditure Accounts” divide incomes into five categories:
1. Wages, salaries, and supplementary labour income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers’ incomes
5. Income from non-farm unincorporated businesses
These five income components sum to net domestic income at factor cost.
Two adjustments must be made to get GDP:
1. Indirect taxes minus subsidies are added to get from factor cost to market prices.
2. Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.
Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is:
GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports
GDP = COE + GOS + GMI + TP & M – SP & M
• Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.
• Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.
• Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.
The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP(I) at factor cost to GDP(I) at final prices.
Total factor income is also sometimes expressed as:
Total factor income = employee compensation + corporate profits + proprietor’s income + rental income + net interest[18]
Expenditure approach
The third way to estimate GDP is to calculate the sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers’ prices.[6]
Market goods that are produced are purchased by someone. In the case where a good is produced and unsold, the standard accounting convention is that the producer has bought the good from themselves. Therefore, measuring the total expenditure used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP.

3. WITHOUT DIAGRAM, CLEARLY DISCUSS CIRCULAR FLOW OF INCOME AND PRODUCT IN A 2- SECTOR ECONOMY, 3-SECTOR ECONOMY, AND 4-SECTOR ECONOMY.

The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow analysis is the basis of national accounts and hence of macroeconomics.
The idea of the circular flow was already present in the work of Richard Cantillon.[3] François Quesnay developed and visualized this concept in the so-called Tableau économique.[4] Important developments of Quesnay’s tableau were Karl Marx’s reproduction schemes in the second volume of Capital: Critique of Political Economy, and John Maynard Keynes’ General Theory of Employment, Interest and Money. Richard Stone further developed the concept for the United Nations (UN) and the Organisation for Economic Co-operation and Development to the system, which is now used internationally.
The circular flow of income is a concept for better understanding of the economy as a whole and for example the National Income and Product Accounts (NIPAs). In its most basic form it considers a simple economy consisting solely of businesses and individuals, and can be represented in a so-called “circular flow diagram.” In this simple economy, individuals provide the labour that enables businesses to produce goods and services. These activities are represented by the green lines in the diagram.
Alternatively, one can think of these transactions in terms of the monetary flows that occur. Businesses provide individuals with income (in the form of compensation) in exchange for their labor. That income is spent on the goods and services businesses produce. These activities are represented by the blue lines in the diagram above.
The circular flow of income is a concept for better understanding of the economy as a whole and for example the National Income and Product Accounts (NIPAs). In its most basic form it considers a simple economy consisting solely of businesses and individuals, and can be represented in a so-called “circular flow diagram.” In this simple economy, individuals provide the labour that enables businesses to produce goods and services. These activities are represented by the green lines in the diagram.
Alternatively, one can think of these transactions in terms of the monetary flows that occur. Businesses provide individuals with income (in the form of compensation) in exchange for their labor. That income is spent on the goods and services businesses produce. These activities are represented by the blue lines in the diagram above.

TYPES OF PRODUCT MODELS
TWO-SECTOR ECONOMY
The circular flow of income is a concept for better understanding of the economy as a whole and for example the National Income and Product Accounts (NIPAs). In its most basic form it considers a simple economy consisting solely of businesses and individuals, and can be represented in a so-called “circular flow diagram.” In this simple economy, individuals provide the labour that enables businesses to produce goods and services. These activities are represented by the green lines in the diagram
Alternatively, one can think of these transactions in terms of the monetary flows that occur. Businesses provide individuals with income (in the form of compensation) in exchange for their labor. That income is spent on the goods and services businesses produce. These activities are represented by the blue lines in the diagram above
THREE- SECTOR ECONOMY
The three-sector model adds the government sector to the two-sector model. Thus, the three-sector model includes (1) households, (2) firms, and (3) government. It excludes the financial sector and the foreign sector. The government sector consists of the economic activities of local, state and federal governments. Flows from households and firms to government are in the form of taxes. The income the government receives flows to firms and households in the form of subsidies, transfers, and purchases of goods and services. Every payment has a corresponding receipt; that is, every flow of money has a corresponding flow of goods in the opposite direction. As a result, the aggregate expenditure of the economy is identical to its aggregate income, making a circular flow.
FOUR-SECTOR MODEL
The four-sector model adds the foreign sector to the three-sector model. (The foreign sector is also known as the “external sector,” the “overseas sector,” or the “rest of the world.”) Thus, the four-sector model includes (1) households, (2) firms, (3) government, and (4) the rest of the world. It excludes the financial sector. The foreign sector comprises (a) foreign trade (imports and exports of goods and services) and (b) inflow and outflow of capital (foreign exchange). Again, each flow of money has a corresponding flow of goods (or services) in the opposite direction. Each of the four sectors receives some payments from the other in lieu of goods and services which makes a regular flow of goods and physical services. The addition of the foreign sector transforms the model from a closed economy to an open economy!

References
Backhouse, Roger E., and Yann Giraud. “Circular flow diagrams.” in: Famous Figures and Diagrams in Economics (2010): 221-230. Chapter 23.
Richard Cantillon, Chantal Saucier (translation) & Mark Thornton (editor) (2010) [1755]. An Essay on Economic Theory. Auburn, Alabama: Ludwig von Mises Institute. ISBN 0-415-07577-7.
Daraban, Bogdan. “Introducing the Circular Flow Diagram to Business Students.” Journal of Education for Business 85.5 (2010): 274-279.
Mankiw, Gregory (2011). Principles of Economics, 6th edition. Thomson Europe.

Gwartney, James D.; Stroup, Richard L.; Sobel, Russell S.; Macpherson, David A. (2014). Macroeconomics: Private and Public Choice. Cengage Learning. pp. 173–5. ISBN 978-1-285-45354-5.
Daraban, Bogdan (2010-06-05). “Introducing the Circular Flow Diagram to Business Students”. Journal of Education for Business. 85 (5): 274–279. doi:10.1080/08832320903449527. ISSN 0883-2323.
Antoin E. Murphy. “John Law and Richard Cantillon on the circular flow of income.” Journal of the History of Economic Thought. 1.1 (1993): 47-62.

Ezeagu Loveth Chiesonu.
Reg. No.: 2019/SD/37566.
Dept.: Education/Economics.
Course: ECO 102 (Principles of Economics II)

1. WHAT ARE THE DIFFERENCES BETWEEN MICRO ECONOMICS AND MACRO ECONOMICS
Microeconomics is the study of economics at an individual, group, or company level. Whereas, macroeconomics is the study of a national economy as a whole. Microeconomics focuses on issues that affect individuals and companies, while Macroeconomics focuses on issues that affect nations and the world economy.
2. DISCUSS THE THREE DIFFERENT WAYS OF COMPUTING GDP
GDP (Gross Domestic Product) is a broad measure of a country’s economic activity, used to estimate the size of an economy and growth rate.
The three Methods of Gross Domestic Product (GDP) Calculation are income method, expenditure method and production (output) method.
A – Expenditure Method –There are three main groups of expenditure household, business, and the government. By adding all-expense we get the this equation. GDP = C + I + G +NX
Where,
• C = All private consumption/ consumer spending in the economy. It includes durable goods, nondurable goods, and services.
• I = All of a country’s investment in capital equipment, housing, etc.
• G = All of the country’s government spending. It includes the salaries of a government employee, construction, maintenance, etc.
• NX= Net country export – Net country import
This can also be written as:-GDP = Consumption + Investment + Government Spending + Net Export
B – Income Method –The income approach is a way for calculation of GDP by total income generated by goods and services.
GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income
Where, Total national income = Sum of rent, salaries profit.
Sales Taxes = Tax imposed by a government on sales of goods and services.
Depreciation = the decrease in the value of an asset.
Net Foreign Factor Income = Income earn by a foreign factor like the amount of foreign company or foreign person earn from the country and it is also the difference between a country citizen and country earn.
C – Production or Value-Added Method –
In this method value is added at the time of production. It is also known as the reverse of the expenditure approach. To estimate the gross value-added total cost of economic output is reduced by the cost of intermediate goods that are used for the production of final goods.
Gross Value Added = Gross Value of Output – Value of Intermediate Consumption
3. WITHOUT DIAGRAMS, CLEARLY DISCUSS THE CIRCULER FLOW OF INCOME AND PRODUCT IN A 2 SECTOR ECONOMY, 3 SECTOR ECONOMY AND 4 SECTOR ECONOMY
A. Circular flow of income and product in 2 sector economy
It refers to the economic model describing the circular movement of money between Firms/Producers and households. It only considers two sectors, household and firms

B. Circular Flow of Income and product in a 3 Sector Economy
The government plays a pivotal role as it consumes a major portion of the money flow in the form of taxes. Hence, the flow of money follows from the firms and households to the government in the form of taxes

C. Circular Flow of Income and product in a 4 Sector Economy
The money flows to households or firms when they buy goods and services from a foreign country, also known as imports. The money flows back to households when foreign countries give them employment.

Name- IJOKO EMMANUEL EJE
Reg no-2019/SD/37654.
Course code- eco…102.
Department: Education/Economics department
The differences between microeconomics and macroeconomics
There are several differences between microeconomics and macroeconomics. But the main difference is that micro looks at small segments of the economy while macro looks at the whole economy. Other differences are as follows;
 Equilibrium – Disequilibrium
 Great Depression and birth of Macroeconomics

THREE DIFFERENT WAYS OF COMPUTING GDP
1. Income Approach :
Formula : Net National Income = Wages + Rent + Interest + Profits
The income approach starts with the income earned from the production of goods and services. Under income approach we calculate the income earned by all the factors of production in an economy.
Factors of production are the inputs which goes into producing final product or service. Thus, the factors of production for a business are – Land, Labour, Capital and Management within the domestic boundaries of a country.
In this approach, we calculate income from each of these Factor of production which includes the wages got by labour, the rent earned by land, the return on capital in the form of interest, as well as business profits earned by management. Sum of All these incomes constitutes national income and is a way to calculate GDP.
To make it gross, we need to do two adjustments – Add depreciation of capital & Add Net Foreign Factor Income. NFFI is (income earned by the rest of the world in the country – income earned by the country from the rest of the world)
GDP (Factor Cost) = Wages + Rent + Interest + Profits+ Depreciation + Net Foreign Factor Income
This basically is the sum of final income of all factors of production contributing to a business in a country before tax.
Now if we add taxes and deduct subsidies, then it become GDP at Market cost.
GDP (Market Cost) = GDP (Factor Cost)+ (Indirect Taxes – Subsidies)

2. Expenditure Approach :
Second approach is converse of Income approach as rather than Income, it begins with money spent on goods & services. This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country.
Mathematically, GDP (as per expenditure method) = C + I + G + (EX-IM)
Where,
C: Consumption Expenditure, ie when consumers spend money to buy various goods and services. For example – food, gas bill, car etc.
I: Investment Expenditure, ie. when businesses spend money as they invest in their business activities. For eaxmple, buying land, machinery etc.
G: Government Expenditure, ie. when government spends money on various development activities and
(EX-IM): Exports minus Imports, that is, Net Exports. ie. we include the exports to other countries in calculation of GDP and subtract the imports from other countries to our country.
The calculation of GDP from the above methods gives us the nominal GDP of the country. We will consider the difference between the Nominal and Real GDP in the coming article.
Mostly GDP is calculated with both approaches and calculations are done in such a way that the values from both approaches should come almost equivalent.
3. Output (Production) Approach :
This measures the monetary or market value of all the goods and services produced within the borders of the country.
In order to avoid a distorted measure of GDP due to price level changes, GDP at constant prices or Real GDP is computed.
GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies.
CIRCULAR FLOW OF INCOME AND PRODUCT
What is circular flow of income?
The circular flow means the unending flow of production of goods and services, income, and expenditure in an economy. It shows the redistribution of income in a circular manner between the production unit and households.
These are land, labour, capital, and entrepreneurship.
• The payment for the contribution made by fixed natural resources (called land) is known as rent.
• The payment for the contribution made by a human worker is known as wage.
• The payment for the contribution made by capital is known as interest.
• The payment for the contribution made by entrepreneurship is known as profit.

CIRCULAR FLOW OF INCOME AND PRODUCT IN A 2-SECTOR ECONOMY
It is defined as the flow of payments and receipts for goods, services, and factor services between the households and the firm sectors of the economy. The outer loop of the diagram shows the flow of factor services from households to firms and the corresponding flow of factor payments from firms to households. The inner loop shows the flow of goods and services from firms to households and the corresponding flow of consumption expenditure from households to firms. The entire amount of money, which is paid by firms as factor payments, is paid back by the factor owners to the firms.

CIRCULAR FLOW OF INCOME AND PRODUCT IN A 3-SECTOR ECONOMY
The three-sector economy model includes the role of government when determining the flow of money. In this type of economy, government plays an essential part. A three-sector economy model rectifies some of the drawbacks of the two-sector model by introducing the following.
1. The government plays a pivotal role as it consumes a major portion of the money flow in the form of taxes.
2. Hence, the flow of money follows from the firms and households to the government in the form of taxes.
3. The government utilizes taxes to develop the infrastructure and many other services like healthcare, education, etc. So, to the firms, the government pays back in terms of incentives and by purchasing their goods.
4. The government pays to the households in terms of interest rates on government securities, pay revisions, government jobs etc.
5. Thus together, it all completes the circular movement of money.
6. If the government’s income from the taxes is less than its expenditure, it is said to have a deficit budget.
As such, the role of government cannot be ignored in any economy because of such a huge control it possesses over the economic cycle. Governmental interference affects the overall economic performance of a country.
A three-sector economy does not consider the role of foreign markets, which has become even more prevalent in the current globalized world.
CIRCULAR FLOW OF INCOME AND PRODUCT IN A 4-SECTOR ECONOMY
The four-sector economy model is an open-ended economy that goes a step beyond by considering the foreign sector’s role in the overall economic cycle. The main features of the four-sector economy are as follows:
1. By the introduction of the foreign sector, the scope widened further. The money flows to households or firms when they buy goods and services from a foreign country, also known as imports.
2. The money flows back to households when foreign countries give them employment. For firms, money flows back when foreign countries purchase their goods and services, also called exports.
3. If the value of imports is equal to the value of exports, it is called balanced trade. If imports are greater than exports, it is referred to as a trade deficit. If exports are greater than imports then it is called a trade surplus.
4. However, in the diagram, for the sake of simplicity, the trade relation (for goods and services) is shown only between firms and foreign markets.
5. In 2019, it was reported the United States had a trade balance deficit of around USD 922.78 billion.
6. Thus, it can be said that the foreign players are investing in the US market, or the US firms are relying on the foreign market to fulfill their production needs and vice-versa.

INTRODUCTION
The branch of knowledge concerned with the production, consumption, and transfer of wealth.
The evolution of today‘s world economies, marked especially by the worst financial meltdown since the Great Depression, has generated a heated debate in the academic world regarding the adequacy of the analysis models of economic behaviour to reality. It also has determined a review of its interdisciplinary study and has caused a reconsideration of its fundamental bases. In other words, the present financial crisis has brought into discussion the need to rediscover that beyond any formal, mathematic and abstract model, economics is a social science (Diacon, 2012, p. 297; Diacon, Donici, Maha, 2013, pp. 27-28) having in its core point the man and his behaviour. Moreover, the latest developments in the fields of psychology and neuroscience made possible a better understanding of the human.behaviour. In these conditions, behavioural economics, a new branch in the field of economics, developed mainly since the 1950s, has increased the interest of the specialists. The specialists try to understand economic decisions and behaviours with instruments mainly from psychology, but also from other social sciences (such as sociology, politics, anthropology, philosophy, biology, or neuroscience). In this respect, Davis appreciated that ―behavioural economics only became a research stream in the mainstream via paradoxes in rational choice theory, though psychological theory has been around forever‖ (Davis, 2008, p. 59). The aim of this article is to examine how behavioural economics can enhance the realism of the economic assumptions using psychological concepts, since the economic behaviour is both the object of the study of economics and a form of human action. Furthermore, the analysis takes into account how this sub-discipline relates with the neoclassical theory and the homo oeconomicus model of economic rational behaviour.
The Economic Behaviour: Object of the Study of Economics and Form of the Human Action The mainstream analysis offers to the individual choice theory a predominantly quantitative point of view. In this vision, market behaviour is influenced by economic variables that can be easily measured and analyzed with mathematical operations and equations, i.e. the price and the quantity of the goods or services and the personal income. In addition, its basic principles, namely rationality, objectivity, efficiency etc., constitute a strong support. The neoclassical model shows that from a certain available income the individual will procure goods and / or services at a certain price on the market, in order to meet their needs. The subject of dispute and debate in the academic world is how he does it. It was assumed that the decision of the individual is objective and that he is perfectly rational and informed, being able to operate with mathematical models. He is also guided only by self-interest. Man follows his own individual utility function. In order to maximize his utility he must be able to mentally calculate and compare. These things have made from the homo economicus the perfect economic man. But what happens when the individual does not comply with these assumptions? When operating on the market, the real economic agent is conducted by more factors. Thus, the individual economic behaviour (as part of the human one) can be influenced by numerous elements (Cătoiu and Teodorescu, 2004, pp. 47-84). Generally, they are grouped into two categories: external and internal. The external factors which are related to the context or the physical environment, in which the individual operates, include the economic, demographic, socio-cultural, and religious aspects. The internal factors are related to the human psyche and comprise personality, motivation, learning, attitude etc. Anyway, many of the

externally influences have become internalized. These behavioural determinants do not occur separately, but form an interconnected network, each determinant having a different degree of importance in various moments. Anyway, what is most often criticized to the traditional model is the attribute of perfect rationality. Man is endowed with a rational principle that distinguishes him in the world. He has a native faculty to think logically, to know and to understand, to some extent, the meaning and the connection between phenomena. But this rationality (and everything related to all human nature), although perfectible, it can never be perfect, pure or complete. Not all the time the economic decisions are rational from an economic point of view. Furthermore, the actions that define economic behaviour are justified in the economic analysis in terms of two approaches: one is objective and rational (based on Cartesian rationalism, determinism and logical positivism) and the other is subjective and empirical (based on scepticism, relativism and culturalism). In time, the hypothesis of rational economic behaviour, which is based on the maximizing assumption, imposed in scientific circles. This was mainly due to its possibility to generate abstractions and to compress a high number of facts in a corresponding universal law or model like is homo oeconomicus. The rationalism and the objective, causal and a priori knowledge considers the comprehension of reality beyond the experience of the observer. Knowledge is gained a priori, independently of experience. In contrast, according to the empiricism and the subjective knowledge, the objective comprehension of reality is affected by the personal perception of the author. However, between these two diametrically opposed views, there is a synthesis performed by the philosopher Immanuel Kant, who argued in terms of a duality of the knowledge process. By invoking the transcendental element, the author proposes a reconciliation vision between subjective and objective, on one hand, and rational and empirical, on the other hand. This, because reason and experience are intertwined in the process of knowledge, they cannot be by their own exclusive way of it (Parthenay, 2008, pp. 26-34). The presence of the individual both as subject and object of the scientific knowledge influences the objectivity of economics and in this respect the remark of von Mises (1998, p. 21) is more than eloquent: ―the objectivity of our science consists precisely in its subjectivity
Rational Choice
In an ideal world, defaults, frames, and price anchors would not have any bearing on consumer choices. Our decisions would be the result of a careful weighing of costs and benefits and informed by existing preferences. We would always make optimal decisions. In the 1976 book The Economic Approach to Human Behavior, the economist Gary S. Becker famously outlined a number of ideas known as the pillars of so-called ‘rational choice’ theory. The theory assumes that human actors have stable preferences and engage in maximizing behavior. Becker, who applied rational choice theory to domains ranging from crime to marriage, believed that academic disciplines such as sociology could learn from the ‘rational man’ assumption advocated by neoclassical economists since the late 19th century. The decade of the 1970s, however, also witnessed the beginnings of the opposite flow of thinking, as discussed in the next section.
Prospect Theory
While economic rationality influenced other fields in the social sciences from the inside out, through Becker and the Chicago School, psychologists offered an outside-in reality check to prevailing economic thinking. Most notably, Amos Tversky and Daniel Kahneman published a number of papers that appeared to undermine ideas about human nature held by mainstream economics. They are perhaps best known for the development of prospect theory (Kahneman & Tversky, 1979), which shows that decisions are not always optimal. Our willingness to take risks is influenced by the way in which choices are framed, i.e. it is context-dependent. Have a look at the following classic decision problem:
Which of the following would you prefer:
1. A) A certain win of $250, versus
B) A 25% chance to win $1000 and a 75% chance to win nothing?
2. How about:
C) A certain loss of $750, versus
D) A 75% chance to lose $1000 and a 25% chance to lose nothing?
Tversky and Kahneman’s work shows that responses are different if choices are framed as a gain (1) or a loss (2). When faced with the first type of decision, a greater proportion of people will opt for the riskless alternative A), while for the second problem people are more likely to choose the riskier D). This happens because we dislike losses more than we like an equivalent gain: Giving something up is more painful than the pleasure we derive from receiving it.
Bounded Rationality
Long before Tversky and Kahneman’s work, 18th– and 19th-century thinkers were already interested in the psychological underpinnings of economic life. Scholars during the neoclassical revolution at the turn of the 20th century, however, increasingly tried to emulate the natural sciences, as they wanted to differentiate themselves from the then “unscientific” field of psychology (see summary in Camerer, Loewenstein and Rabin, 2011). The importance of psychologically informed economics was later reflected in the concept of ‘bounded rationality’, a term associated with Herbert Simon’s work of the 1950s. According to this view, our minds must be understood relative to the environment in which they evolved. Decisions are not always optimal. There are restrictions to human information processing, due to limits in knowledge (or information) and computational capacities (Simon, 1982; Kahneman, 2003).
Gerd Gigerenzer’s work on “fast and frugal” heuristics later built on Simon’s ideas and proposed that the rationality of a decision depends on structures found in the environment. People are “ecologically rational” when they make the best possible use of limited information-processing abilities, by applying simple and intelligent algorithms that can lead to near-optimal inferences (Gigerenzer & Goldstein, 1996).
While the idea of human limits to rationality was not a radically new thought in economics, Tversky and Kahneman’s ‘heuristics and biases’ research program made important methodological contributions, in that they advocated a rigorous experimental approach to understanding economic decisions based on measuring actual choices made under different conditions. About 30 years later, their thinking entered the mainstream, resulting in a growing appreciation in scholarly, public, and commercial spheres.

Assignment discuss the three different ways of computing GDP
GDP is the final value of the final goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.
It counts the goods and services produced within the country and hence does not consider the products that the country imports from another country.
GDP is a broad measure of a country’s economic activity, used to estimate the size of an economy and growth rate. Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their business strategy. Investors also watch GDP since it provides a framework for investment decision-making.
The “corporate profits” and “inventory” data in the GDP report are a great resource for equity investors, as both categories show total growth during the period. Corporate profits data also displays pre-tax profits, operating cash flows and breakdowns for all major sectors of the economy
GDP is Gross Domestic Product and is an indicator to measure the economic health of a country. The formula to calculate GDP is of three types – Expenditure Approach, Income Approach, and Production Approach.
Expenditure approach: The final products in this economy are cars and machines (which are capital goods); steel, and tires are intermediate products. So Consumption (of cars) is 5000. Of this amount, 1000 is exported (NX), so 4000 must be consumed domestically (C). Machines are capital goods and are thus an investment by the car firm. Hence I is 2000. There is no information about G, so we must assume it is zero. so GDP is 5000 + 2000= 7000

Production approach (value added approach). The value added by a firm is obtained by subtracting the value of intermediate products from the transaction value (i.e. sales value of its product). The steel and tire producer are assumed to have no intermediates and so their value added is 4000 and 500. the machine producer sells the machine at 2000 but uses 1000 worth of steel in production. Therefore, its value added is 2000 – 1000 = 1000. The car producer sells its output at 5000 but its intermediates are steel worth 3000 and tires worth 500. Thus its value added is 1500. Aggregating the value added by each firm gives, 4000 + 500 +1000 + 1500 = 7000.

Income approach. Firms ultimately distribute their revenue back to households through factor payments (e.g. wages, profits etc). Thus the money left after firms pay for their intermediate goods is ALL paid to households as wages, profits and so on. Thus value of the income paid by a firm equals the value added. So aggregating the factor payments by each firm (i.e. household incomes) will still equal 7000.

I

Name: Chukwuma Lilian Chioma
Reg no: 2019/SD/37731
Dept: Education Economic
Eco 102 quiz 1

(1) The difference between microeconomics and macroeconomics:
(a). Microeconomics on the other hand is the study of the economic acts of the individual and firm. It is the study af particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities etc.
But macroeconomics deals with the aggregate of these quantities not with individual incomes but with national income, not with the individual prices but the general price levels, not with the individual output, but with the national output.
(b). Microeconomics deals with the division of total output among industries, products, firms and the allocation of resources among completing uses. It considers the problem of income distribution, with its interest on relative of particular goods and services. While the brother macroeconomics concerns itself with such variables as aggregate volume of the output of the economy, the extent of which resources are employed, the size of the national income and the general price levels.
(c). Microeconomics sums or aggregates at the sectoral or individual levels (households, firms etc). While macroeconomics uses the aggregate together as they affect the national economy as a whole.

(2). The three different ways of computing GDP are:
(a). Income method: The income method starts with the income earned from the production of goods and services. Under income method we calculate the income earned by all the factors of production in an economy.
(b). Expenditure method: This begins with money spent on goods and services. This measured the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country.
(c). Output method: This measures the monetary or market value of all the goods and services produced within the borders of the country.

(3). The circular Flow of income and products in a 2-sector economy, 3-sector economy and 4-sector economy;
(a). The 2-sector economy:
The 2-sector economy is a simple economy, which is made up of only the households and firms. It is a two-sector economy with no government. In this type of economy, it is assumed that the households spend all their income on consumer goods as soon as that income is received. All consumption is assumed to take place in the households. This means that the business sector does not consume finished goods. On the other hand, it is assumed that all production is done by firms and that the firms sell all their entire output to consumers as soon as it is produced.
(b). The 3-sector economy:
The three-sector economy is when the government enters the circular flow of income. There are now two new channels along which funds can flow from households to product markets. First, governments take in revenue from taxes they Levy on households. Some of that revenue is immediately returned to households in the form of transfer payments. The difference between what governments collect as tax revenue and what is they payout as transfer payments is called net secondly Funds thus flow from households to government as net taxes and then from government to product markets as government purchases of goods and services exceed net taxes, government may borrow the difference from the public through financial markets.
(c). The 4-sector economy:
The four- sector economy is the addition of foreign sector in the circular flow of income. In this sector it shows that some of the expenditures made by consumers, firms and governments do not flow to domestic product markets but instead flow to foreign countries to pay for imports of goods and services.