Free Essay on Gross Domestic Product and Circular Flow of Income

Published: 2023-08-09
Free Essay on Gross Domestic Product and Circular Flow of Income
Type of paper:  Essay
Categories:  Macroeconomics Money Essays by pagecount
Pages: 4
Wordcount: 912 words
8 min read

The primary definition of the Gross Domestic Product is the total monetary value of trading activities carried out in a nation within a particular period, such as one year. In this definition, there are four main components involved, which include business investment, personal consumption, net exports, and government spending. The four elements work together to quantify what a country can produce best, which is equivalent to what the said economy is spending. In the same light, the circular flow of income is defined as an economic model representing major exchanges as flows of services, goods, and money. The model measures the income and expenditure in a country by analyzing the close circuit exchange in the flows of commodities and capital. Although these aspects have corresponding values, they often move in opposite directions, showing how money moves in the economy, such as how households make purchases in firms using the income they gain from working in other firms.

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Inflation and Demand-Pull Factors

Inflation is primarily detrimental to any economy for various reasons, most of which are centered on the loss of value for people’s money. One of the reasons why it is a problem is that for those who hoard cash as a way of saving, inflation often erodes the ultimate purchasing power of the amount that had initially been saved. Similarly, long-term planning becomes impossible due to the uncertainty of monetary value over time, making investment challenging to sustain. A major factor is a demand-pull inflation, which refers to a situation where a given service or good’s aggregate demand outweighs its aggregate supply when consumer demand increases (Amadeo, 2012). The demand-pull factors can be caused by five primary elements, one of which is a growing economy. In this case, families tend to spend more than they save when they feel confident.

Secondly, the expectation of inflation often entices consumers into buying more commodities now to avoid an increase in costs later. Such also happens when there is a significant stretch in monetary supply, where the circulating money is too much yet chasing extremely limited goods. Fourthly, a discretionary fiscal policy, such as increased spending on the governmental level as well as strong brands created through marketing, equally lead to demand push-pull. The fifth cause is technology as an organization that invents a trendy technology often dominates the current market until a time when another firm creates a better one. Consequently, consumers only focus on the latest technology in goods that can actively transform their contemporary lives.

Economies of Less Developed and Developing Countries

Various features can be used to describe less developed countries, the greatest of which is widespread poverty resulting from low per capita income. Subsequently, such countries tend to have high populations, which translates to an increased dependency rate. In the same light, unemployment is rampant as it becomes impossible to create sufficient jobs for the dense populations (Pal, 2015). On the other hand, developing countries can implement various approaches to improve their economic situation. The most essential one is to eliminate corruption in public institutions to curb the loss of revenue. Another strategy is to employ a highly educated and capable labor force, which increases productivity in all economic sectors (McDonald, 2017). A good military and security foundation is also necessary as the country expects to change its status.

Customs Union and Protectionist Policies

Customs Union is a form of arrangement where a group of countries allows free trade among themselves while charging the rest of the world a standard set of tariffs. This means that tariffs are abolished within the confines of the specific states but apply for any other country outside the group. A practical example of such an arrangement is the European Union’s common commercial policy in which all European Union member states are involved. The states have handed over the authority to oversee all external negotiations in the trade arena on their behalf to the European Commission (Elsig, 2017). The primary goal here is to ensure that the member countries increase trade amongst themselves as well as their bargaining power in relation to the rest of the world.

Protectionist policies refer to the efforts of specific countries to regulate the supply quantity of goods flowing in. The main objective is to ensure that sufficient tools are put in place to eliminate unhealthy competition for the local markets from international operators. Some of types of protectionism include tariffs, which make imported goods more expensive (Boyce, 2010). Another type is import quotas, which limit the quantity of goods coming into the country. An excellent example is when Mexico set a 250,000-ton limit on imported sugar. The government can also give subsidies to local manufacturers to reduce prices and protect consumers through export subsidies. Controlling exchange rates also helps in regulating the cost of imports, while the restriction on FDI prevents foreigners from taking over local markets. For instance, countries like China often require various firms to link up with local companies before they can start selling their goods


Amadeo, K. (2012, March 20). 5 causes of demand-pull inflation. The Balance. Retrieved May 18, 2020, from

Boyce, P. (2020, April 9). Protectionism definition. BoyceWire - Thinking Economics: Home. Retrieved May 18, 2020, from

Elsig, M. (2017). The EU's common commercial policy: institutions, interests and ideas. Taylor & Francis.

McDonald, D. (2017, April 27). Four recommendations for how the poorest countries can increase their GDPs. Observer. Retrieved May 18, 2020, from

Pal, D. (2015, December 19). 7 main characteristics of less developed countries (LDCs). Economics Discussion. Retrieved May 18, 2020, from

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