Circular Flow Of Income Flashcards
Define circular flow of income.
Where income flows from firms to households in form of factor payments and households to firms in form of consumption expenditure.
Explain the phases of circular flow of income.
1) Generation Phase: Firms produce goods and services with the help of factor service.
2) Distribution Phase: Where income flows from firms to households in form of factor payments
3) Disposition Phase: Where income flows from households to firms in form of consumption expenditure.
Define Stock Variable
Variables measured at a particular point of time.
Define flow Variable
Variables measured over a period of time.
Differentiate between Stock and flow.
Stock:
- Measured at a particular point of time.
- Doesn’t have a time dimension.
- Static Concept
- Example: population as on 22.09.2004
Flow:
- Measured over a period of time
- time dimension is over a period of time
- Dynamic concept
- Example: population during 2004
What are the types of circular flow?
Real and Money Flow
Define Real Flow.
Flow of goods and services between firms and households.
Define Money Flow.
Flow of money between firms and households.
Differentiate between Real flow and Money flow.
Real Flow:
- flow of goods and services between firms and households.
- Involves exchange of goods and services.
- Difficulties of barter system.
- Also called Physical Flow.
Money Flow:
- Flow of money between firms and households.
- involves exchange of money.
- No such difficulties
- Also called Nominal Flow.
Describe the four sectors of the economy.
Households: Supply factors of production and receive factor payments from firms.
Firms: Supply goods and services and receive factors of production from households.
Government: As welfare agency: Maintains law and order
As producer: produces goods and services in PSEs
Foreign Sector: flow of capital and goods between domestic and foreign sectors.
State the sectors in a simple economy.
Households: Supply factors of production and receive factor payments from firms.
Firms: Supply goods and services and receive factors of production from households.
What is a closed economy?
Its only has 3 sectors: households, firms and government and no foreign sector.
What is an open economy?
It have all the 4 sectors: households, firms, government and foreign sector.
State the assumptions made in 2 sector economy.
1) Only 2 sectors: households and firms.
2) Household only supply factor services to firms
3) Firms sell entire produce to households
4) No savings by households or firms
State the conclusions of a simple 2 sector economy.
1) Total production by firms=Total consumption by firms
2) Factor payments=Factor income
3) Consumption expenditure=Factor Income
4) Real Flow=Money Flow
