Circular Flow of Income

Circular Flow of Income

Circular flow of Income is a cyclical flow between Household and Firm( Industry)

Since in class 12th we have to learnt for two sector economy that's why we will consider household and (Firm) Industry only for concept

One Important thing that everyone need to understand is that Circular flow of income will complete only once Real Flow and Money Flow both will be completed between household and Firm

So Household provide Raw material, Land, Labor, Capital & Entrepreneurship to Firm in terms of Real Flow similarly Firm produce Goods and Services for household in terms of Real Flow

and to avoid the problem of Barter system Money Flow is required to complete the process of Circular Flow of Income so Firm Paid Factor payment to household for their factor services in terms of Rent, Wages, Salaries, Interest & Profit. Though Household also paid monetary payment of Goods and Services to Firm for their goods and services and for the household it's a consumption expenditure

So this is how Circular Flow of Income Completed between Household and Industry once both Real Flow and Money Flow completed that complete the process of Circular Flow of Income

Stock

Stock refers to those variables which are measurable at a given point of time.

Stock is static

Stock has no time dimension while.

Stock Depends on Flow

For eg. Wealth is stock, Capital is stock

Flow

Flow refers to those variables which are measurable during a given a period of time.

Flow is dynamic.

Flow has time dimension

Flow Depends on stock

For eg. Income is flow, Capital formation is flow.

Real Flow

Real Flow is the exchange of goods and services between household and firms

It involves exchange of goods and services

Real Flow household sector supplies raw material, land, labour, capital and enterprise to firms and in return firms sector provides finished goods and services to household sector

Difficulties of barter system for the exchange of goods and factor services between households and firms sector in real flow

Money Flow

Money Flow is the monetary exchange between two sectors

It involves exchange of money

Money Flow firm sector gives remuneration in the form of money to household sector a wages and salaries, rent, interest etc.

No such difficulty or inconvenience arise in money flow.