Circular flow of income class 12 pdf: Meaning, Types, Two Sector Economy, Stock and Flow

Sectors in an Economy

  •  Household sector 
  •  Firms 
  •  Government sector 
  •  Foreign Sector 

What is a Circular flow of income?

It refers to the cycle of generation of income in the production process, its distribution among the factor of production, and finally, its circulation from households to firms in the form of consumption expenditure on goods and services produced by them. 

Three Phases of Circular Flow of income : 

  1. Generation Phase / Production Phase: Firms produce goods and services with help of factor services.
  2.  Distribution phase / Income Phase: Flow of factor income (rent, wages, interest, and profit )from the firm to the household.
  3.  Disposition Phase / Expenditure Phase: Income received by a factor of production is spent on goods and services produced by the firm. 

Types of Circular flow of income

BasisReal FlowMoney Flow
MeaningIt is the flow of goods and services between firms and households.It is the flow of money between firms and household.
Kind of exchangeIt involves exchange of goods and services.
It involves exchange of money.
Difficulty in exchangeThere may be difficulties of barter system in exchange
of goods and factor services.
There is no such difficulty in case of money flow.
Alternative NameIt is also known as Physical Flow.It is also known as Nominal Flow

Circular Flow Under Two Sector Economy

  • There are only 2 sectors in the economy . Household sector and firm .
  •  Initially , Household sector supplies factor services to firms and in return firms gives factor payment to the household sector for their services . 
  •  Further,  Firm produces goods and services and sell the entire output to the household sector and in return household sector spend entire amount on consumption of goods and services . 

Stock and Flow

MeaningIt refers to that variable which is measured at a particular point of time.It refers to that variable which is measured over a period of time.
Time DimensionIt does not have a time dimension.It has a time dimension.
Nature of conceptIt is static concept.It is a dynamic concept.

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