Circular flow of income - it refer to flow of generation of income of production

and finally distribultion of factor services freom household to firm in form of

consumption exp for good and service provided by them
Phases - 1 ) Production ( Generation phase ) = It refer to phase in which goods
and services are produced with help of factor services
2 ) Income ( Distribution ) = This phase involves flow of factor services
( rent wages intrest salary and profit ) from household to firm
3 ) Disposition ( Expenditure ) = This phase involves the income recieved
from factor of production for good and service provided by firm
Production phase
( Generation phase )

Income
phase

( Distribution phase )

Expenditure phase
( Dispostion phase )
Type of flow - 1 ) Real flow = The flow of factor services from household to firm
and corresponding flow of good and service from firm to household
- This is called Physical flow
- In this flow there is transcition of good and services
between two firm withour including real money
- This flow determine magnitude of growth of economy . Eg -
If firm get large amount of good and services then value of production and speed of
proccess will also increase
2 ) Money flow - The flow of factor service from houseold to firm
and corresponding flow of consumption expenditure from ouse to ousehold
- This is also called nominal flow
- In this flow there is involment of money transcition
between two firm
Circular flow of income ( without financial market ) = Household are owner of
factor service and consumer of good and service
- Goods and service produced by firm should be sell to household
only
If we want to make our analysis we need to take ssome
assumptions
- There are only two sector - Household and firm .
There is no goverment and foriegn sector
- Total output of goods and service produced by the
household are consumed by the firm
- Household sell their good and services to only firm
and firm sell their factor payment to only household
- There are no saving in economy
- The entire amount should be used on consumption of
goods and service by firm
The outer loop shows the real flow i.e - flow of factor services from
household to firm and corresponding flow of good and service from firm to household
The inner loop show the money flow i.e - flow of factor services from
household to firm anbd corresponding flow of consump expindture from firm to
household
Conclusion - 1 ) Total output of goods and services produced by household =
Consumption of good and services by firm
 2 ) Factor payment of houseold = factor income of firm
3 ) Consumption expenditure of household = factor payment of firm
4 ) Real flow in form of good and services , final good = Money
flow between household and firm
Important note - The total amt of money will be paid by firm ( production
factor ) will be paid by the owner of factor of production. So there will be
constant flow of money income
Circular flow of income ( with financial market ) = Household are ownwer of
factor services and consumer of good and services
- Goods and service produced by firm are to
be sold to household only
Finacial market - Finacial institution such as bank , insurance companies
etc which can give affordable fund
If we want to make analysis we need to take some assumptions
- There are two sector only household and firm , there is no
goverment or foriegn sector
- Factor services produced by household sould be used by firm
only and goods and services produced by firm should be only used by household
- There is no saving in economy
- The entire amt should be used for consumption on goods and
services by firm
- The entire output of goods and service produced by firm
should be used by household only
The outer loop show the real flow i.e - the flow of factor service from
household to firm and corresponding flow of goods and services from firm to
household
The inner loop show the money flow i.e - the flow of factor service from
household to firm and corresponding flow of consumption expenditure from firm to
household
In pratical way the household do not spent his entire amt on consumpton
i.e - some part of income is saved , firm save some part of reciept for the
expandation and other reason. Firm take loan for the finance of his expandation
programmes
All borrowings and saving are channelized through financial market .
4 Sector of economy - 1 ) Household sector - This sector consist of
consumer of good and services and owner of factor services . They supply factors
like Land , Labour , Capital and Enterpenur who get income as Rent , Wages, Intrest
, Profit
2 ) Producing sector ( Firm ) - This sector
consist of all producing firm of economy. The firm make goods and services with the
help of factor services
# The householding sector also consume the good and services
to satisfy their wants and help firm make goods and services to make profit
3 ) Goverment sector - They play 2 roles
a ) Welfare - The govt play his
role as welfare by maintaing law and order , defence
b ) Producers - They create goods
and services in govt single enterpenures
4 ) Foriegn sector ( Rest of the world )- This
consist of transcition with rest of world . The capital flow between the domestic
economy and rest of world is also part of foriegn sector
Types of economy - 1 ) Open economy Country- Open economy country
refer to country having relation with other nations . According to current scenario
every country has economic relation with other nations . The country with open
economy has 4 sectors - household , producing , goverment and Foriegn sector
2 ) Close economy country - Close economy
country refer to country not having economic relation with other nation . According
to current scenario there are very less country having close economy and no economy
relation with other nation . The country with close economy has 3 sector -
Household , producing , goverment sector. They do not foriegn sector
Stock - It is variable which is measurable which is
measurable after particular point of time .
It is not time dimensional
It has static concept
Eg - National wealth
Qty of wheat stored
Flow Variable - It is variable which is measurable over a
period of time .
It is time dimensional as its magnitude can
be measured over period of time
It is dynamic concept
Eg - National income
Qty of wheat produced
Eg of stock variable can be amt of water in tank as it can be measured
over period of time . Similarly Capital is also stock vbariable as it can be
measured over a point of time.\
Nopw , if water in flowing over the tank top then the water of tank will
be change after a
Leakage - Refers to borrowing of money from circular
flow of income
When household and firm save a part from their
income there is leakage in circular flow of income
Leakage also refers as part of income which do
not pass through circular flow of income
The income which cannot be used in prodution
of good and services
Leakage reduce flow of income
Eg in different economies - i) Circular flow of
income ( Without financial market )= No leakage
ii)Circular flow of
income ( With financial market )= Savings
Injections - Refer to additon of income in circular flow
of income
When household and firm take borrowings from
external sources like financial institution
Such additional saving do not have immediate
expenditure
Injection increase the flow of income
Eg in different economies - i) Circular
flow of income ( Without financial market ) = No injection
ii) Circular
flow of income ( With financial market ) = Investment