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Circular Flow of Income

The document explains the concept of the circular flow of income in microeconomics, highlighting the interdependence between four sectors: households, producers, government, and the rest of the world. It describes the continuous flow of money and real resources between these sectors and outlines the significance of understanding this flow for estimating national income. Additionally, it distinguishes between real flow (physical flow of services and goods) and money flow (financial transactions).

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2 views

Circular Flow of Income

The document explains the concept of the circular flow of income in microeconomics, highlighting the interdependence between four sectors: households, producers, government, and the rest of the world. It describes the continuous flow of money and real resources between these sectors and outlines the significance of understanding this flow for estimating national income. Additionally, it distinguishes between real flow (physical flow of services and goods) and money flow (financial transactions).

Uploaded by

s19339
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CIRCULAR FLOW OF

INCOME
 Learning Objective:
 Students will be able to
 define the microeconomic circular flow of

income
 interpret examples that illustrate the

behavior of economic Factors


 provide stylized examples of their own to

show understanding
FOUR SECTORS OF THE
ECONOMY
 1.HOUSEHOLD SECTOR: They are the conumers
and owners of the factors of production.
 2.PRODUCER SECTOR: It includes all
producing units in the economy.
 3.GOVERNMENT SECTOR:It includes
government as a welfare agency and as a
producer.
 REST OF THE WORLD SECTOR: It includes
exports and imports of goods and the flow of
capital between the domestic economy and
rest of the world.
Circular Flow of Income (Two Sector Model)
Circular Flow of Income is a
diagrammatic presentation of the interdependence
between different sectors of an economy.
Assumptions
(i) There are only two sectors, namely households
and firms.
(ii) It is a closed economy.
CIRCULAR FLOW OF
MONEY
 Flow of money from producers to
households is a continous process. Likewise
the flow of money from households to
producers is a continous process.This inter
sectoral flow never stops.Hence it is called
‘circular flow’.
Real Flow (Physical Flow):
Households supply factor services like land,
labour, capital and organization to the firms.
The firms produce goods and services and supply
them to households. It is called Generation Phase.
It does not involve the use of money.
Money Flow (Nominal Flow):
Firms pay Rent, Wages, Interest and Profit (Factor
Payments) to the households. It is called
Distribution Phase.
Households pay it back to the firms in the form of
consumption expenditure. It is called Disposition or
Dispensation Phase. Here money flows between
sectors.
Significance of circular flow of
money
Due to
1. Knowledge of inter-sectoral
interdependence
2. Estimation of National Income

Circular flow of money is also known as “


circular flow of income”

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