Chapter - 2 - Circular Flow Of Income

Question 1

Firm

Answer 1

Firms produces goods and services and sell them to the household

Question 2

Household

Answer 2

Households are the owners of factors of production and consumers of goods and services

Question 3

What is known as a closed economy

Answer 3

• A simple economy assumes the existence of only two sectors,household sector and firm sector
  -household
  -Firm
  -This type of economy is a closed economy in which there is no government and foreign trade

Question 4

Observation of the diagram and draw it or Economy os working on a axiom that one person’s expenditure is another person’s income

Answer 4

• Houshold sectors supplies factor services only to firm and the firms hire factor services only from houshold
• Firms produce goods and services and sell their entire output to the houshold. Houshold receives factor income for thier services and spend the entire amount on consumption of goods and services
• There are no savings in the economy and no export or import of goods
• The outer loop of the diagram shows Real Flow and the inner loop shows money flow
• This flow of income continues as production is a continuous activity due to never ending human wants
• So, Total Production = Total Consumption
  Factor Payment = Factor Income
  Therefore, Real Flow = Money Flow

Question 5

Stock

Answer 5

Stock refers to that variable which is measured at a particular point of time
eg: Stock of goods in the goddown as of 31st Jan 2018

Question 6

Flow

Answer 6

Flow refers to that variable which is measured over a period of time.
eg: Production of goods during the month of 2018,Birth rate in the year 2017.Period of time can be a week or month or years