Question

Consider the hypothetical example of Dominion Island that has firms producing only two goods, gold and cotton, the proceeds of which it uses to purchase other goods and services from neighbouring islands through its banks. Assuming that all other required institutions in an economy are prevalent in this island, discuss the circular flow of income and

Answer 1

Answer:

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Explanation:

Answer 2

Circular Flow of Income is in what way money moves from one point to another via an economy.

Explanation:

The groups in this island of Dominion are;

1. The firms
2. The banks
3. The workers
4. The neigbouring islands

For the firms, they have:

• In one case, "cash outflows" to laborers working to produce the 2 products cotton & gold.
• And in another case, the firms are consumers as they pay for other products that is available in neighboring islands.
• For banks, they get "cash inflows" as they "receive payments" from both firms.
• For the workers who earn wages from companies, they accept such earnings as cash inflows into their own households which they spend thus making them consumers & will possibly save some portion of their wages.
• For the neighboring islands, they get "cash inflows" from "Dominion island" as exports.

Inflow

• Money flows from those who produce gold & cotton.
• The 2 firms producing goods (cotton & gold) also inject money into the economy when they invest & expand their operations. This is referred to as (I).    
• As the produce cotton & gold & export to other neighboring Islands, more money flows into the economy. This is typified by (X).
• Through the money earned, they pay their workers, which is when the Consumption loop is concluded, the banks make money of the transacts and then support their employees.

Outflow

• Both the bank and the gold and cotton production firms and the workers who have earned salary all pay the govt taxes (T). It reduces the circulation of money but still makes government spending. The government loop  is now concluded.
• The household & businesses also keep money aside. This is known as savings (S) & also has a way of "reducing money" from the economy when it "increases".
• A more outflow happens as the two firms import raw materials and labor. Let's mark this (M). Consider this (M). The money leaves  the economy as imports arise and the import-export loop is completed

Inflow-Outflow factors      

• All the income/inflows into Dominion Island are considered as C+G+X+I while All the outflows/expenditure of Dominion Island are considered as T+S+M.
• The relationship between  "inflow & outflow" also helps us to understand the GDP of Dominion Island.
• Put in the form of an equation GDP for Dominion Island therefore  
• = C+G+I+ (X – M).