Income (Y) in an economy flows from one part to another whenever a transaction takes place. New spending (C) generates new income (Y), which generates further new spending (C), and further new income (Y), and so on. Spending and income continue to circulate around the macro economy in what is referred to as the circular flow of income. The circular flow of income forms the basis for all models of the macro-economy, and understanding the circular flow process is key to explaining how national income, output and expenditure is created over time.

The following diagram shows the circular flow for an economy. It illustrates the interaction of firms and household in markets. This TMA requires you to write a structured essay in which you try to use this diagram to illustrate the flow of spending and money in the economy.Your essay can be written through the following guidance:

Step 1:

Review the chapter material. This TMA is about the nature of the circular flow of income, so you may want to review the section "The Circular of Income", which begins on page 312 of your text book Economics and Economic Change.Provide brief explanation about the circular flow showing its importance in measuring economy.

Step 2:

Use the above diagram to illustrate the interaction of firms, government and households in markets. Explain the flow of spending and money in the economy. How can we measure GDP as the total income received by households? What is the relationship between firms and the government?How the interaction is made between the financial system and the rest of the world?

Step 3:

Economists use GDP to measure total production in the economy. For that purpose, we would like GDP to be as comprehensive as possible. Discuss whether there are shortcomings in GDP as a measure of total production and as a Measure of well-being.

Your essay should be within the specified range of words, and you must follow the Harvard Style of Referencing. You are expected to present a well structured and organized piece of work that is of your own. Plagiarism will be penalized by deduction of marks. The assessment of the quality of your essay will be based on how you impress the reader (grader) about your knowledge and understanding of the topic. Attempt to use your own words and avoid using copy-paste. Your TMA should be attached with the following PT3form.