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    Circular flow diagram

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    A. Gross Domestic Product (GDP)
    b. Real GDP
    c. Unemployment rate
    d. Inflation rate
    e. Interest rate
    explain how the circular flow diagram illustrates the interaction of households, government, and business. Also, describe how current economic conditions are effecting organization which you are familiar. Identify the most important economic indicator affecting your organization and explain why.

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    Solution Preview

    Gross domestic product (GDP) can be calculated in three different ways. The expenditure approach takes consumption expenditures plus private domestic investment plus government purchases of goods and services plus net exports. The income approach measures GDP as the sum of incomes of factors of production. The Value-added Approach measures GDP as the sum of value added at each stage of production. All of these methods are intended to reveal the true size of the economy. We use changes in GDP to determine how well fiscal and monetary policies are working.

    Nominal GDP tell us how much the total value of the economy changed. However, if prices were higher, we don't know if the economy really grew. We therefore need to adjust GDP for inflation and find real GDP. When GDP is multiplied by the GDP deflator it is then "real GDP." By using the GDP deflater, we can find out how much GDP really increased.

    The unemployment rate measures the percentage of those in the labor force actively looking for work. People who aren't employed can be either unemployed or not within the labor force. Those too young or too old to work are not considered part of the labor force, and thus are not considered unemployed. The government considers only those actively looking for work as unemployed. If a person has sought employment in the last four weeks they are considered unemployed. Anyone waiting to be recalled to a job from which they were laid off is also ...

    Solution Summary

    Gross domestic product (GDP) illustrated through the use of a circular flow diagram; current economic conditions and the business climate.