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Circular flow model, GDP, Business Cycles and Unemployment

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Please help with the following questions.

1. Using the basic circular flow model, explain why the value of businesses' output of goods and services equals the income of households.

Suppose the U.S. nominal GDP increases form one year to the next year. Can you conclude that these figures present a misleading measure of economic growth? What alternative method would provide a more accurate measure of the rate of growth?

2. What is the basic cause of the business cycle?

How does structural unemployment differ from cyclical unemployment?

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Solution Summary

This is a brief discussion on the circular flow model, GDP, business cycles and unemployment.

Solution Preview

On the circular flow model, it is assumed that what the business firms produced is consumed entirely by the household. The purchasing power of the households is limited by the amount of income. This principle equates the output of goods and services to the income of households.

GDP are measured either in terms of nominal values and constant price.
GDP at nominal ...

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