Circular Flow Of Income

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Circular flow of income is the system of inter-relationships between the major sectors of economic activity. It shows how money income and goods and services move in a circular manner from producers t…

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First, in any exchange process, the seller or producer receives the same amount that the buyer or consumer spends. Second, goods and services flow in one direction while money payments flow in the opp…

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The three phases are production, distribution, and expenditure. Production is the generation of income, distribution is the sharing of income as factor payments, and expenditure is the spending of inc…

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Because goods and services are produced by firms using factors of production, and this production creates income. The income is generated during the production process itself.

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In the distribution phase, firms make factor payments to households. Households receive income in the form of wage, rent, interest, and profit for providing factor services.

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Consumption expenditure is spending by households on goods and services to satisfy wants. Investment expenditure is spending by producers on final goods. Both belong to the expenditure phase, but they…

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A flow variable is measured over a period of time. It has a time dimension and is a dynamic concept. Examples include income and saving.

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A stock variable is measured at a particular point of time. It has no time dimension and is a static concept. Examples include number of machines in a plant, bank balance on a specific date, and popul…