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It refers to flow of income or flow of goods and services

across different sectors of an economy in a circular form.

Meaning of Circular Flow

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TYPES OFCIRCULAR FLOW

Product Flow(Real Flow)

Factor FlowProduct / Goods

Flow

Income Flow(Monetary Flow)

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REAL FLOW

• It refers to flow of factor services and flow of goods and services.

It consists of:

a) Factor flow, i.e. flow of factor services

b) Product flow, i.e. flow of goods and services

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MONEY FLOW• In a monetised economy the flow of

factor services generates money flows in the form of factor payments which take the form of income flow.

• The expenditure on goods and services take the form of expenditure flow.

• Income and expenditure flows move in circular manner in an opposite direction.

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CIRCULAR FLOW OF INCOME IN A TWO SECTOR

ECONOMY

To present the flow of income and expenditure the economy is divided

into two sectors:

•Household sector •Firm sector

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HOUSEHOLD SECTOR

• They are owners of all factors of production.

• They receive factor income.

• They are consumers of goods & services.

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FIRM SECTOR

• They hire factors of production from the households

• They produce and sell goods & services to the households and receive income from them.

• They make factor payments to the households.

Prepared By:- KVS, Delhi Region

Prepared By:- KVS, Delhi Region

In a simple economy

• Total production of goods and services by firms = Total consumption of goods and services by household sector

• Factor payments by firms = Factor incomes of households

• Consumption expenditure of households = Income of firms

• Real flow = Money flow

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Questions for self-EvaluationWhat is circular flow ?State the difference between Real

flow and money Flow .Differentiate between factor

income and factor payment. Explain diagrammatically the

circular flow of two sector economy.

Who are the owners of factor of production.

Prepared By:- KVS, Delhi Region

Compiled by:-

• Mrs. Anita Bhardwaj KV ,

Vigyan Vihar

• Mrs Monika Bajaj KV ,Tagore

Garden

• Mrs Leena Singh KV,AGCR

• Mr Sri Keshav KV , no.2 Delhi

Cantt

• Mrs Ritu Tanwar KV, AFS Rajokri