CIRCULAR FLOW OF INCOME

GRADE 12TH

SUBJECT:MACROECONOMICS

CIRCULAR FLOW OF INCOME

MEANING OF CIRCULAR FLOW OF INCOME

CIRCULAR FLOW OF INCOME REFERS TO GENERATION OF INCOME AND EXPENDITURE FROM HOUSEHOLDS TO FIRMS IN THE FORM OF CONSUMPTION EXPENDITURE ON GOODS AND SERVICES PRODUCED BY THEM.

PHASES OF CIRCULAR FLOW OF INCOME

1. GENERATION
2. DISTRIBUTION
3. DISPOSITION

STOCK AND FLOW

1. STOCK

STOCK VARIABLE REFERS TO THE VARIABLE , WHICH IS MEASURED AT A PARTICULAR PERIOD OF TIME .

  2.  FLOW

FLOW VARIABLE REFERS TO THE VARIABLE , WHICH IS MEASURED OVER A PERIOD OF TIME.

Basis	Stock	Flow
Time Dimension	There is no time dimension	Time dimension exists as the magnitude can be scaled over a period of time
Nature of concept	It is a static concept	It is a dynamic concept
Examples	Total number of Hero Honda bike in Bangalore National Wealth	Hero Honda Car manufactured during February 2018 National Income

TYPES OF CIRCULAR FLOW

1. real flow
2. money flow

• Real Flow- The term real flow means the flow of factor services from household to firms. Similarly, the flow of goods and services from firms to household

• Money Flow- The Money flow refers to the flow of factor payments from firm to household for factor services. Similarly, the flow of consumption expenditure from household to firm for the purchase of goods and services manufactured by the firm.

Government sector performs the following activities in the economy.

• They collect taxes from households and firms
• They make transfer payments to the households and provides subsidies to the firms
• They make the payment for the purchase of goods and services from the firms
• They save and borrows money with the help of the financial market.

Circular Income Flow in a Two Sector Economy:

The outer circle represents real flow and the inner circle represents the monetary flow. Real flow indicates the factor services flow from household sector to the business sector, and goods and services flow from business sector to the household.

• The state of equilibrium in the two-sector economy is defined as a situation in which no change occurs in the levels of income (Y), expenditure (E), and output (O).

i.e. Y=E=O