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1
CIRCULAR FLOW OF INCOME

LEARNING OBJECTIVES

1.1 INTRODUCTION
1.2 MEANING OF CIRCULAR FLOW OF INCOME
1.3 STOCK AND FLOW
1.4 TYPES OF CIRCULAR FLOW
1.5 CIRCULAR FLOW IN A SIMPLE ECONOMY (TWO-SECTOR ECONOMY)

1.1 INTRODUCTION
The unlimited and recurring wants of human beings have made the production process, a
continuous process. In this process, different factors of production: Land, Labour, Capital and
Enterprise are combined together for production of goods and services.
Firms produce goods and services with collective efforts of factors of production supplied
by the household sector
" Firm makes payment to the factors of production in the form of rent, wages, interest and
profit (known as factor incomes).
" The household sector spends this money on the purchase of goods and services produced
by the firms.

Thus, income flows first from firms to households in the form of factor paymentsand then, from households
to firms in the form of consumption expenditure. Such a flow of money is known as the circular flow of
income.

1.2 MEANING OF CIRCULAR FLOW OF INCOME

Itrefers to cycle of generation of income in the production process, its distribution among
the factors of production and finally, its circulation from households to firms in the form of
consumption expenditure on goods and services produced by them.
Phases of Circular Flow of Income
There are 3 different phases (generation, distribution and disposition) in circular flow of income,
as shown in the given diagram:
1.1

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1. Generation Phase: In this phase, firms

produce goods and services with the help
of factor services. Production Phase
(Generation of Income)
2. Distribution Phase: This phase involves the
flow of factor income (rent, wages, interest
and profit) from firms to the households. Income Phase
(Distribution of Income)
3. Disposition Phase: In this phase, the income
received by factors of production, is spent
on the goods and services produced by
firms. Expenditure Phase
(Disposition of Income)

In this way, income generated in production units Fig. 1.1

reaches back to production units and makes the
circular flouw complete.
1.3 STOCK AND FLOW
The concepts of stock and flow are used frequently in macroeconomics. Some of the macro
variables relate to stock, while others relate to flow. Therefore, it is important to understand
their meaning so that variables can be categorised as stock or flow.
Next
Stock
Stock variable refers to that variable, which is measured at a particular point of time. For
example, stock of goods in the godown as on 31st January, 2019. It means, stock variables are not
time dimensional. Some more examples of stock variables are National wealth, National capital,
Money supply etc.
Flow
Flow variable refers to that variable, which is measured over a period of time. For example,
production of goods during the month of January 2019, birth rate in the year 2018, National
Income in the year 2018 are flow variables. The 'period of time' could be a day, a week, a year,
etc. It means, flow variables are time dimensional as they are measured for a period of time.
Examples for Better Clarity
" The amount of water in tank is the quantity of water in Stock of water
in a tank
the tank at a given point of time. On the other hand, water
flowing into the tank from a tap is a flow of water being
added to the tank per unit of time.
" The total number of houses as on December 31, 2018 is the
stock concept, while the number of houses constructed
during the year 2018 is a flow variable. Flow of water
from tank
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DifferIUU DIWEUJUUN auT UW

Basis Stock Flow

Meaning Stock variable refers to that variable, Flow variable refers to that variable,
which is measured at a particular point which is measured over a period of
of time. time.
Time It does not have a time dimension. It has a time dimension as its
Dimension magnitude can be measured over a
period of time.
Nature of It is a static concept. It is a dynamic concept.
concept
Examples 1. Population of India as on 31.03.18. 1. Number of births during 2018.
2. Total number of Maruticars in Delhi.2. Maruti cars manufactured during
January, 2019.
3. Money supply (money in circulation).3. Expenditure or transactions in
money.
4. National Wealth. 4. National Income.
5. Quantity of wheat stored. 5. Quantity of wheat produced.
1.4 TYPES OF CIRCULAR FLOW
There are two types of circular flows: (i)) Real flow; (ii) Money Flow.
Real Flow
Real flow refers to the flow offactor services from households to firns and the corresponding Next
flow of goods and services from firms to households.
As seen in the diagram, households provide factor services Factor Services
to the firms which, in turn, provide goods and services to |(Land, Latbour, Capital and Enterprise)
them as a reward for their productive services. Households Firms
" It is also known as 'Physical flow'.
There is only exchange of goods and services between -Goods and Services
the two sectors without involvement of any money. Flg. 1.2

Real flow determines the magnitude of growth process in an economy. For example, when
more factor services are offered to firms, then volume of production will be more and it
speeds up the process of economic growth.
Money Flow
Money Flow refers to flow offactor payments from firms to
households for their factor services and corresponding flow Consumption
Expenditure
of consumption expenditure from households to firms for (On Goods and Services)

purchase of goods and services produced by the firms. Households Firms

As seen in the diagram, firms make factor payments to

households for their factor services and households spend this Factor Payments
(Rent, Wages, Interest dProfit)
income on purchase of goods and services produced by the Fig. 1.3
firms.
" It is also known as Nominal flow'.
It involves exchange of money between the two sectors.
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DifrereICE DEWEEITTEdTTTOW aruTMoney Flow
Basis Real Flow Money Flow
Meaning It is the flow of goods and services Itis theflow of money between firms
between firms and households. and households.

Kind of exchange It involves exchange of goods and| It involves exchange of money.

services.

Difficulty in There may be difficulties of barter system There is no such difficulty in case
exchange in exchange of goods and factor services. of money flow.
Alternative Name t is also known as Physical Flow. It is also known as Nominal Flow.

Four Sectors of the Economy

The four major sectors in an economy according to the macroeconomicpoint of view are:
1. Household Sector: It includes consumers of goods and services and also the owners of
factors of production. They supply factors like land, labour, capital and entrepreneur and
receive income in return in the form of rent, wages, interest and profit respectively.
2. Producing Sector (Firms): It includes all producing firms in the economy. To produce
goods and services, the firm hires factors of production from the households.
Households consume goods and services to satisfy their wants and firms produce goods and
services to make a profit.
3. Government Sector: It acts in two capacities: Next
As a welfare agency, it is involved in maintaining law and order, defence and other
services of public welfare.
"As a producer, it produces goods and services in public sector enterprises.
4. Foreign Sector (or External Sector or Rest of the World Sector): This sector includes
transactions with the rest of the world. It is involved in export and import of goods and
flow of capital between the domestic economy and other countries of the world.
1.5 CIRCULAR FLOW INA SIMPLE ECONOMY (TWO-SECTOR ECONOMY)
A simple economy assumes the existence of only two sectors, i.e. household sector and firm
sector.

" Households are the owners of factors of production and consumners of goods and services.
" Firms produce goods and services and sell them to the households.
It is the simplest form of closed economy*t, in which there is no government sector and foreign
trade.
"Closed Economy and Open Economy
Closed Economy is an economy which has no economic relations with rest of the world.However,
in the current scenario, there is hardly any country which does not have any economic relations
with other nations. Aclosed economy has 3 sectors: Household Sector, Producing Sector and
Government Sector, i.e. it does not have any Foreign Sector.
Open Economy is an economy which has economic relations with rest of the world. In the current
scenario, all the nations have economic relations with other nations. An open economy has 4
sectors: Household Sector, Producing Sector, Government Sector and Foreign Sector.
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In orueT UTIIK UII UuTysTS 5TnpIe, wetakesome assunnptions:

1. There are only 2 sectors in the economy: Households and Firms. It means, there is no
government and foreign sector.
2. Household sector supplies factor Cact or Sevices
Labour
services only to firms and the firms hire (Land,
Capital and

ServtesJE)nterpise)
Gonsumption Bpenditure
factor services only from households. OnGoods and
3. Firms produce goods and services
and sell their entire output to the
households.
4. Households receive factor income for Households Firms
their services and spend the entire
amount on consumption of goods and
services.
ntsProfit
5. There are no savings in the economy, Facto rrPay ym
(Rent, GoodWages, and
and

i.e. neither the households save from Inter est ces

s 1Servic
their incomes, nor the firms save from
Fig. 1.4
their profits.
The Circular flow in Two-Sector economy can be better understood with the help of Fig. 1.4.
The outer loop of diagram shows the real flow, i.e. flow of factor services from households Next
to firms and corresponding flow of goods and services from firms to households.
The inner loop shows the money flow, i.e. flow of factor payments from firms to households
and the corresponding flow of consumption expenditure from households to firms.
It must be noted that entire amount of money, which is paid by firms as factor payments is paid back by
the factor owners to the firms. So, there is acircular and continuous flow of money income.
In the circular flow of income, production generates factor income, which is converted into
expenditure. This flow of income continues as production is a continuous activity due to never
ending human wants. It makes the flow of income circular.
Conclusions of Circular Flow in a Simple Economy
In a Two-Sector Economy, the following Conclusions can be drawn:
(i) Total Production of goods and services by Firms = Total Consumption of goods and
services by Households.
(ii) Factor Payments by firms = Factor Incomes of households.
(ii) Consumption Expenditure by households =Factor Income of households.
(iv) Real Flow in the form of factor services and final goods and services = Money Flow
between firms and households.
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TREVISION OF KEY POINTS

" Circular Flow of Income refers to the cycle of generation of income in the production process, its
distribution among the factors of production and finally, its circulation from households to the production
units in the form of consumption expenditure on goods and services produced by these units.
" Three Phases of Circular Flow of Income
(i) Generation Phase; (i) Distribution Phase; (ii) Disposition Phase.
" Flow Variable refers to that variable, which is measured over a period of time.
" Stock Variable refers to that variable, which is measured at a particular point of time.
" Real Flow refers to flow of factor services from households to firms and the corresponding flow of goods
and services from firms to households.
Money Flow refers to flow of factor payments from firms to households for their factor services and
corresponding flow of consumption expenditure from households to firms for purchase of goods and
services produced by the firms.

Synonyms or Similar Terms of this Chapter

Real Flow Physical Flow
Money Flow Nominal Flow

HOTS HIGHER ORDER THINKINGSKILLS QUESTIONS

Next
Q.1. "In atwo-sector economy, national product is equal to national income." Comment.
Ans. Ina two-sector model, the national product, in terms of money value of goods and services produced,
is distritbuted among the productive factors. It means, total money value of output is given to factors of
production in the form of rent, wages, interest and profit for their factor services. So, national product
(value of the goods and services produced) is exactly equal to national income (income generated).
Q. 2. "Flowof income is circular in a two-sector economy:" Comment
Ans. The given statement iscorrect, i.e. flow ofincome is circularin a two sector economy The income received
by households from firms for their factor services is spent by them on purchase of goods and services
produced by the firms. Thus, income goes back from where it had come. This flow of income continues
as production is a continuous process.
Q.3. How does real flow consist of factor flowand product flow?
Ans. Real flow consists of two kinds of flows:
(i) Factor flow: lt is the flow of factor services from households to firms.
(ii) Product Flow: It is the flow of goods and services from firms to households.
Q. 4. Classify the following as Stock and Flow:
(i) Amount of bank deposits as on 31.03.2018
(iü) Losses (CBSE, Delhi Comptt. 2011)
(ii) Production of cement in the year 2018
(iv) Profit (CBSE, AIl India Comptt. 2011)
(v) Population of India as on 31 st March, 2018
(vi) Number of literate people as on 31.03.2018
(vii) Savings (CBSE, AIl India Comptt. 2011, Delhi 2013)
(viii) National income of a country
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(CBSE, AlIndia Comptt. 2011, Delhi 2013)

(x) Number of persons employed during December
(xi) Balance in a bank account (CBSE, Al India Compt. 2011)
(xii) Raw material in a godown as on 31st Jarn, 2019
(xii) Production (CBSE, Delhi Comptt. 2011)
(xiv) Wealth (CBSE, Delhi Comptt. 2011, Delhi 2013)
(xv) Gross domestic product (CBSE, Delhi 2013)
Ans. (i) Stock as they are related to a point of time.
(ii) Flow as losses are measured over a period of time.
(iii) Flow as production is measured over a period of time.
(iv) Flow as profit is measured over a period of time.
(v) Stock as population is related to a point of time.
(vi) Stock as it is related to a point of time.
(vii) Flow as savings are related to a period of time.
(viii) Flow as national income is related to a period of time.
(ix) Stock as capital is related to a point of time.
(X) Flow as it is related to a period of time.
(xi) Stock as it is related to a point of time.
(xii) Stock as it is related to a point of time.
(xii) Flow as production is measured over a period of time. Next

(xiv) Stock as wealth is related to a point of time.

(xv) Flow as gross domestic product is measured over a period of time.
Q.5. Explain the circular flow of income. (CBSE, Delhi 2013, Delhi Comptt. 2015)
Ans. The Circular flow of income can be better understood with the help of following diagram:
Factor Service.
(Land,
abour, Capital and
Consumpt
On
tion
Goocs
Exp
Enterpse
and Seviendicteur s) e

Households Firms

Poft)
Factor Pa ymeestand
n
(Rent, Wages.hter Services
Gooisa nd

Incomes are first generated in production units due to the joint efforts of factor owners from households.
These incomes are distributed to the factor owners who in turn spend the income on purchasing goods
and services produced in production units. This makes the circular flow of income complete.
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Qo. oUTar TIUW UrIGUTTIE awo ector economy is based on the axiom that one's expenditure is
other's income'. Do you agree with the given statement? Support your answer with valid reasons.
(CBSE, Sample Paper 2020,2020 (58/2/1)
Ans. Yes, the given statement is correct. In a two sector economy, the firms produce goods and services and
make factors payments the households. The factor income earned by the households will be used
to buy the goods and services which would be equal to income of firms. The aggregate consumption
expenditure by the households in the economy is equal to the aggregate expenditure on goods and
services produced by the firms in the economy (Income of the producers).

NCERT QUESTIONS GUIDELINES

1. Describe the four major sectors in an economy according to the macroeconomic point of view.
Hint: Refer Circular Flow ina Four-Sector Economy' given in Power Booster Section.
2. What are the four factors of production and what are the remunerations to each of these caled?
Hint: The four factors of production are: (i) Land, (ii) Labour, (ii) Capital, and (iv) Entrepreneur. Their
remuneration takes the form of (i) Rent, (ii) Wages, (ii) Interest, and (iv) Profit.
3. Distinguish between stock and flow. Between net investment and capital which is a stock and which
is a flow? Compare net investment and capital with flow of water into a tank.
Hint: Discuss "Difference between Stock and Flow". Between net investment and capital, capital is a stock
and net investment is a flow.

OBJECTIVE QUESTIONS
FILL IN THE BLANKS Next

1. In the phase, income received by factors of production, is spent on goods and services
produced by
2. In a two-sector economy, there is no and sector.
3 variable refers to that variable, which is measured at a particular point of time.
4. flow determines the magnitude of growth process in an economy.
5. variables are time dimensional.
6. Real Flow is also known as
7. In a two-sector economy, Household sector supplies factor services only to and the
firms hire factor services only from
8. Real Flow involves exchange of and
9. is also known as Nominal Flow.
10. phase involves flowof factor income from firms to the households.
11. variable is a dynamicconcept.
12. Flow offactor payments and payments forgoods and services between households and firms is known
as (Nominal Flow/ Physical Flow)
13. 2,000 note lying in wallet of Rohini, a student is an example of (stock/flow) variatble.
(CBSE,2020 (58/4/1))
Ans. 1. Disposition, Firms; 2. Government, Foreign; 3. Stock; 4. Real; 5. Flow;6. Physical flow; 7. Firms,
Households; 8. Goods, Services; 9. Money Flow; 10. Distribution; 11. Flow. 12. Nominal Flow; 13. Stock
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TmUOR FALSE with REASONS

1. Capital formation is a flow. (CBSE, Sample Paper 2010)
True. Capital formation is measured over a period of time.
2. Real flow is also known as nominal flow.
False. Money flow is known as nominal flow. Real flow is known by the name of physical flow.
3. Generation and distribution are the two phases in circular flow of income.
False. There are 3 different phases (generation, distribution and disposition) in circular flow of income.
4. In a two-sector economy, total production is always equal to total consumption.
True. It happens because firms sell their entire output to the households.
5. National Income of a country is a stock concept.
False. It is a flow concept as it is measured over a period of time.
6. Circular flow of income does not take place in case of closed economy.
False.Even in case of closed economy, circular flow of income (i.e. three phases of generation, distribution
and disposition) takes place between households and firms.
7. There are no exports in a closed economy.
True. A closed economy is the one which has no economic relations with the rest of the world. Accordingly,
there are no exports in this economy.
8. 'Inventory is a stock variable.' {CBSE, 2020 (58/5/1))
True. It is a stock variable as it is measured at a point of time.
Next
MATCHING TYPE QUESTIONS
Q.1. From the set of statements given in Column Iand Column Il, choose the correct pair of statements:
Column l Column Il

(a) Money Flow (i) It involves exchange of goods and services

(b) Stock (iüi) It has a time dimension
(c) Real Flow (ii) It is also known as Physical Flow
(d) Flow (iv) It is a static concept.
Ans. (c) Real Flow- (i) It is also known as Physical Flow.
Q.2. Match the statements given underA with the correct options given under B.
(A) (B)
() Stock a. National Income
b. National Wealth

Ans. () b.
Q.3. Match the statements given under A with the correct options given under B.
(A) (B)
() Nominal Flow a. It involves exchange of goods and services
(ii) Physical Flow b. It involves exchange of money
Ans. () b; (i) a.
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Q.. vraorUeoaoITIerrS yrverruruerAwith the correct options given under B.
(A) (B)
(i) Real Flow a. Static Concept
(ii) Flow b. Flow of goods and services between firms and households
(i) Money Flow c. Variable measured over a period of time
(iv) Stock d. Nominal Flow

Ans. () b; (i) c; (ii) d; (iv) a.

(MCQs) MULTIPLE CHOICE QUESTIONS and
(MRQs) MULTIPLE RESPONSE QUESTIONS
In the following Questions, there may be one or more than one correct answer. You have to mark all the correct answers.
1. Which of the following is a phase of circular flow of income?
(a) Generation Phase (b) Circulation Phase
(c) Disposition Phase (d) Allof these
2. Which of the following is not an example of flow variable?
(a) Number of births during a year (b) National wealth
(c) National Income (d) Balance in Bank Account
3. Which of the following is not considered a factor income?
(a) Rent (b) Pocket Money Next
(c) Gifts from abroad (d) Profit
4. Two-sector economy consists of:
(a) Households, firms (b) Firms, Foreign sector
(c) Households, Government (d) Firms, Government
5. Stock variable is a variable which is:
(a) Measured over a period of time (b) Measured at a particular point of time
(c) Does not have a time dimension (d) None of these
6. Losses are classified as:
(a) Stock variable (b) Flow variable
(c) Either (a) or (b) (d) Neither (a) nor (b)
7. Real flow is also known as:
(a) Nominal flow (b) Physical flow
(c) Money flow (d) Both (a) and (b)
8. Which of the following sector is not included in a two-sector economy?
(a) Households (b) Firms
(c) Foreign (d) Government

9. Money flow involves exchange of:

(a) Goods and services (b) Gifts
(c) Money (d) None of these
10. Real flow refers to the flow of factor services from
(a) Firms to households (b) Households to firms
(c) Firms to government (d) Households to government
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1.11
11.TaUNTU CUUTOTTy, TTIU Included.
(a) Households (b) Firms
(c) Government (d) Foreign sector
12. Which of the following is not a flow? (CBSE, Delhi Comptt. 2015)
(a) Capital (b) Income
(c) Investment (d) Depreciation
13. Which of the following is a stock? (CBSE, AIl India Comptt. 2015)
(a) Wealth (b) Saving
(c) Exports (d) Profits
14. Which of the following diagram represents Real Flow?
Consumption Goods and Factor Factor
Expenditure Services Services Services

Households |Firms Households Firms Households Firms Households Firms

Goods and Factor Goods and Factor

Services Services Services Payments
(a) (b) (c) (d)
15. What does the following diagram represent?
Consumption
Expenditure

Households | Firms

Factor
Payments Next
(a) Real Flow (b) Money Flow
(c) Nominal Flow (d) Both (b) and (c)
16. Circular Flow of Income is correctly represented in the diagram:
Factor Services Goods and Services Factor Services Goods and Services

Consumption Consumption Factor Factor

Expenditure Expenditure Payments Payments

Households Firms Households Firms Households FirmsHouseholds Firms

Factor Factor Consumption Consumption

Payments Payments Expenditure Expenditure
-Goods and Services Factor Services Goods and Services Factor Services

(a) (b) (c) (d)

17. Which of the following is a flow? (CBSE, DelhiComptt. 2016)

(a) Deposits in a bank (b) Capital
(c) Depreciation (d) Wealth
18. Which of the following is a stock? (CBSE, Al India Compt. 2016)
(a) Savings (b) Production
(c) Consumption of fixed capital (d) Capital
19. Flow of Goods and services and factors of production across different sectors in a barter economy is
known as: (CBSE, Sample Paper 2016)
(a) Circular Flow (b) Real Flow
(c) Monetary Flow (d) Capital Flow
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1.1 Page No 16 /569 Introductory Macroeconomics
20.-wrrruvuo wuUrarmuroryuvuardmoney in an economy is known as
(a) Real Flow (b) Nominal Flow
(c) Circular Flow (d) None of these
21. In a two-sector economy, depend on for supply of factor services.
(a) Firms, Households (b) Households, Firms
(c) Firms, Government (d) Government, Households
22. Which of the following is included in Real Flow?
(a) Flow of Services (b) Flow of Goods
(c) Both (a) and (b) (d) Flow of Money
23. Inventory is a concept, whereas the change in inventory is a concept.
(CBSE, Sample Paper 202 1)
(a) Stock, Flow (b) Flow, Stock
(c) Stock, Stock (d) Flow, Flow

Ans. 1. (a),(c); 2. (b), (d); 3. (b), (c); 4.(a); 5. (b), (c);6. (b); 7. (b); 8.(c), (d);9. (c); 10. (b); 11. (d);
12. (a); 13. (a); 14. (c); 15. (d); 16. (a); 17. (c); 18. (d); 19. (b);20. (c);21. (a); 22. (c); 23. (a)

ASSERTION REASON QUESTIONS (ARO)

1. Read the following statements: Assertion (A) and Reason (R). Choose one of the correct alternatives
given below:
Assertion (A): Savings are zero in case of two-sector economy.
Reason (R):Households spend the entire factor income received from firms on consumption of goods Next
and services.
Alternatives:
(a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A)and Reason (R) are True and Reason (R) is not the corect explanation of Assertion (A).
(c) Assertion (A) is True but Reason (R) is False.
(d) Assertion (A) is False but Reason (R) is True.
2. Read the following statements:Assertion (A) and Reason (R). Choose one of the correct alternatives
given below:
Assertion (A): Stock variable does not have a time dimension.
Reason (R): Stock variable is measured over a period of time.
Alternatives:
(a) Both Assertion (A) and Reason (R)are True and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A)and Reason (R) are True and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is True but Reason (R) 0s False.
(d) Assertion (A) is False but Reason (R) is True.
3. Read the following statements: Assertion (A) and Reason (R). Choose one of the correct alternatives
given below:
Assertion (A): Total production is equal to total consumption in case of circular flow in a two-sector
economy.
Reason (R):Household sector supplies factor services onlyto firms and the firms hire factor services
only from households.
Alternatives:
(a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct explanation of Assertion (A).

|| C
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u puuTASUruUryarueasuryareTrue and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is True but Reason (R) is False.
(d) Assertion (A) is False but Reason (R) is True.
4. Read the followingstatements: Assertion (A) and Reason (R). Choose one of the correct alternatives
given below:
Assertion(A): Real Flow is also known as Nominal Flow
Reason (R): Real Flow involves flow of goods and services between firms and households.
Alternatives:
(a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A)and Reason (R) are True and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is True but Reason (R) 0s False.
(d) Assertion (A) is False but Reason (R) is True.
Ans. 1. (a); 2. (c); 3. (b);4. (d).

REVISION EXERCISE
(VSAQs) VERY SHORT ANSWER TYPE QUESTIONS (1 Mark each)
Q.1. What is meant by circular flow of income?
Ans. Circular flow of income refers to cycle of generation of income in the production process, its distribution
among the factors of production and finally, its circulation from households to firms in the form of
consumption expenditure on goods and services produced by them.
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Q. 2. What are the three phases of circular flow of income?
Ans. Generation Phase; Distribution Phase and Disposition Phase.
Q.3. What is the function of households in the circular flow (two-sector model)?
Ans. Households supply factor services to the firms and spend their entire income on the consumption of
goods and services produced by the firms.
Q. 4. What are stock variables? (CBSE, AllIndia 2011, Delhi 2012, 2016)
Ans. Stock variables refer to the variables, which are measured at a particular point of time.
Q.5. Define flow variable. (CBSE, Delhi 2011, All India 2012, 2016)
Ans. Flow variable refers to that variable, which is measured over a period of time.
Q. 6. Is national income a stock concept or flow concept?
Ans. National income is a flow concept as it is measured over a period of time.
Q.7. What are the two types of circular flows?
Ans. The two types of circular flows are.: () Real flow; (i) Money flow.
Q. 8. What is meant by real flow or physical flow?
Ans. Real flow or physical flow refers the flow of factor services from households to firms and the
coresponding flow of goods and services from firms to households.
Q.9. Define nominal flow. (CBSE, Sample Paper 2017)
Ans. Money flow or nominal flow refers to the flow of factor payments fronm firms to households for their factor
services and the corresponding flow of money, from households to firms, in the form of consumption
expenditure on the purchase of goods and services produced by the firms.
Q. 10. Name the two sectors in which real flow takes place in a simple economy.
Ans. (i)Household Sector, (i)Firm Sector.
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1.1 Page No 18 /569 Introductory Macroeconomics
Q. ave any woeAAITIpes UTIUW UUTCept. (CBSE, Delhi 2019)
Ans. () National Income; (ii) Investment.
SHORT ANSWERTYPE QUESTIONS (3-4 Marks each)
1. Explain the circular flow of income. (CBSE, Delhi 2009, Delhi Compt. 2014, All India 2017 ())
OR
Explain Circular Flow of Income in a two sector economy. (CBSE, 2020 (58/5/1))
2. What are the different phases of a circular flow of income?
3. What is meant by circular flow of income? Distinguish between Real Flow and Money Flow.
(CBSE, Delhi 2003)
4. "Households and Firms depend on each other in the circular flow of income." Justify the statement in
case of a two-sector mnodel.
5. Distinguish between stocks and flows. Give an example of each.
{CBSE, Foreign 2010, AllIndia 2013,2017 (II), Delhi 2018)
6. Discuss briefly, the circular flow of income in a two sector economy with the help of a suitable diagram.
(CBSE, Sample Paper 2019)
LONG ANSWER TYPE QUESTIONS (6 Marks each)
1. Briefly explain the money flow and the real flow of income.
2. Describe the circular flow of income in a two-sector economy (without financial market).
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