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2.circuler Flow of National Income

Households provide resources like labor, land, and capital to businesses through factor markets in exchange for money payments. Businesses then use these resources to produce goods and services, selling them to households through product markets in exchange for household expenditures. This creates a circular flow of resources and money between households and businesses that allows the economy to continuously function through recurring exchanges of goods, services, and payments between the two sectors.

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Safeer Khan
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23 views2 pages

2.circuler Flow of National Income

Households provide resources like labor, land, and capital to businesses through factor markets in exchange for money payments. Businesses then use these resources to produce goods and services, selling them to households through product markets in exchange for household expenditures. This creates a circular flow of resources and money between households and businesses that allows the economy to continuously function through recurring exchanges of goods, services, and payments between the two sectors.

Uploaded by

Safeer Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Circular Income Flow in a Two Sectors economy:

Real flows of resources, goods and services have been shown in Fig.
In the lower loop of this figure, the resources such as Labor, land and capital flow from
households to Factor Market and flow to business Firm as indicated by the arrow mark. In
opposite direction to this, money flows from business firms to the factor market as payments
such as wages, rent, interest and profits and from factor market it flow to household as Income.
In the upper loop of the figure, money flows from households to product market and from
product market it flows to business firm as consumption expenditure made by the households on
the goods and services produced by business firm, while the flow of goods and services is in
opposite direction from business firms to households. Thus we see that money flows from
business firms to households as factor payments and then it flows from households to firms.

Thus there is, in fact, a circular flow of money or income. This circular flow of money will
continue indefinitely week by week and year by year. This is how the economy functions. It may,
however, be pointed out that this flow of money income will not always remain the same in
volume.

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