Circular Flow Model, GDP, and Inflation

Imagine the chief executive officer (CEO) of General Motors (GM) is concerned that members of the GM’s strategic planning committee are unfamiliar with basic economic principles. The CEO has assigned you the task of developing a 1,050-word report to review those basic principles. 

Your report should include an introduction and a conclusion.  The message, Thesis Statements, Introductions, and Conclusions,

Use the bolded words/phrases shown below as first-level headings for your paper.  Your paper should discuss the:Roles of Economists.  Explain the role of an economist as a scientist as well as a policymaker.  Include at least one real-world example of an economist (a real person) and the role he or she plays.

  • Circular Flow Model.  Explain the interconnections displayed in the circular flow model with specific real-world examples of: (1) households, (2) firms, (3) product (goods/services) market, and (4) factor markets.  Be sure you explain the flow of money and goods in an economy.
  • Allocation of Resources.  Explain how an economy’s scarce resources are allocated among households, firms, and government agencies by: (1) the forces of supply and demand, (2) prices, and (3) government policies.  Include at least one specific real-world example of one of the above allocation mechanisms. 
  • Gross Domestic Product.  Define the term gross domestic product (GDP) and provide a specific real-world example of each of the four major components of GDP.
  • Consumer Price Index.  Explain the five steps involved in how the consumer price index (CPI) is constructed. 

The course text lists three problems inherent in the measuring changes in the cost of living – from your experience as a consumer, provide a specific real-world example of one of those three problems.

Hints: Use the following chapters from Mankiw’s Principles of Macroeconomics as your source of background information;

  • Chapter 2 (Thinking Like an Economist).
  • Chapter 4 (The Market Forces of Supply and Demand).
  • Chapter 6 (Supply, Demand, and Government Policies).
  • Chapter 7 (Consumers, Producers, and the Efficiency of Markets).
  • Chapter 10 (Measuring a Nation’s Income).
  • Chapter 11 (Measuring the Cost of Living). 

  Resources: National Bureau of Economic Research

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