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Let’s put dollar amounts on the flows in the circular flow diagram below. a. Suppose that businesses buy a total of $180 billion of the four resources (labour, land, capital, and entrepreneurial ability) from households. If households receive $92 billion in wages, $26 billion in rent, and $36 billion in interest, how much are households paid for providing entrepreneurial ability?$ billion for entrepreneurial abilityb. If households spend $95 billion on goods and $85 billion on services, how much in revenues do businesses receive in the product market?$ billion

Question

Let’s put dollar amounts on the flows in the circular flow diagram below. a. Suppose that businesses buy a total of 180billionofthefourresources(labour,land,capital,andentrepreneurialability)fromhouseholds.Ifhouseholdsreceive180 billion of the four resources (labour, land, capital, and entrepreneurial ability) from households. If households receive 92 billion in wages, 26billioninrent,and26 billion in rent, and 36 billion in interest, how much are households paid for providing entrepreneurial ability?billionforentrepreneurialabilityb.Ifhouseholdsspend billion for entrepreneurial abilityb. If households spend 95 billion on goods and 85 billiononservices,howmuchinrevenuesdobusinessesreceiveintheproductmarket?85 billion on services, how much in revenues do businesses receive in the product market? billion

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Solution

a. To find out how much households are paid for providing entrepreneurial ability, we need to subtract the total amount paid for wages, rent, and interest from the total amount businesses buy of the four resources.

So, 180billion(totalresources)−180 billion (total resources) - 92 billion (wages) - 26billion(rent)−26 billion (rent) - 36 billion (interest) = $26 billion for entrepreneurial ability.

b. The total revenues businesses receive in the product market is the sum of what households spend on goods and services.

So, 95billion(goods)+95 billion (goods) + 85 billion (services) = $180 billion.

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