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Chapter 1 Class XII

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26 views5 pages

Chapter 1 Class XII

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alkaagarwal529
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UNIT-1 NATIONAL INCOME AND RELATED AGGREGATES

1.CIRCULAR FLOW OF INCOME


1.What are the four factors of production?
a) Land
b) Labour
c) Capital
d) Enterprise (Entrepreneur)

2. What are factor payments?


Factor payments refers to the income received for supplying the factors of production: land,
labour, capital and entrepreneurship.

• Land-Rent
• Labour- Wages
• Capital- Interest
• Entrepreneurship/Enterprise -Profit

3. Define Circular Flow of Income.


It refers to a cycle of generation of income in the production process, whereby the income
flows first from the firms to the households in the form of factor payments and then, from the
household to the firms in the form of consumption expenditure.
In other words, it 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
firms in the form of consumption expenditure on goods and services produced by them.
It refers to flow of money income or the flow of goods and services across different sectors of
the economy in a circular form.

4.Explain the phases of Circular Flow of Income.


There are three different phases of Circular Flow of Income are-

• GENERATION PHASE (Production Phase)-It is primarily concerned with income


generation. In this phase, firms produce goods and services with the help of factor
services.
• DISTRIBUTION PHASE (Income Phase)-This phase involves the flow of factor income
(rent, wages, interest and profit) from firms to households.
• DISPOSITION PHASE (Expenditure phase)-In this phase, the income received by the
factors production is spent on goods and services produced by the firms.

5. Define stock and flow concept.


Stock variable refers to the variable, which is measured at a particular point of time.
Flow variable refers to the variable which is measured over a period of time.

6. Difference between stock and flow.


BASIS STOCK FLOW

1.MEANING Stock variable refers to the Flow variable refers to the variable
variable, which is measured at a which is measured over a period of
particular point of time. time.
2.TIME
DIMENSION It does not of any time dimension. It has a time dimension, as its
magnitude can be measured over a
period of time.
3.NATURE It is static in nature. It is dynamic in nature

7.Classify the following as Stock and Flow:

• Amount of bank deposits as on 31st March,2022. [Stock]


• Losses [flow]
• Production of cement in 2021[flow]
• Profit[flow]
• Population of India as on 31st March, 2021 [stock]
• Number of literate people as on 31.03.2021[stock]
• Savings[flow]
• National income of a country[flow]
• Capital[stock]
• Number of persons employed during December[flow]
• Balance in a bank account[stock]
• Raw material in a godown as on 31st Jan, 2022[stock]
• Production[flow]
• Wealth[stock]
• Gross domestic product[flow]
• Distance[stock]
• Speed [Flow]
• Money Supply [Stock]
• Export & Import [Flow]
• Water in a tank [Stock]
• Water in a river [Flow]
• Investment or Foreign Investment [Flow]
• Foreign Assets [Stock]
• Foreign Remittances [Flow]
• Income of a servant/worker [Flow concept]
• Budget Expenditure [Flow]

8. What are the types of circular flow of Income?


There are 2 types of circular flow of income-

• REAL FLOW/PHYSICAL FLOW-Real flow of income implies the flow of factor services
from the household sector to the firm (producing sector) and the corresponding flow of
goods and services from the firms to the household sector.

• MONEY FLOW/NOMINAL FLOW-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.

9.What are the four sectors of the economy?

The four sectors of the economy are-

• HOUSEHOLD SECTOR-Consumer of goods and services and the owner of factor of


production.
• FIRMS OR PRODUCING SECTOR- It includes all the producing firms in an economy.
• GOVERNMENT SECTOR- It acts as a welfare agency and a producer.
• FOREIGN SECTOR OR REST OF THE WORLD-It includes all the dealings and
transactions with the rest of the world.

10.Define open and closed economy.


An open economy has economic relations with the rest of the world. It includes all the
four sectors of the economy namely Household, firms, government and foreign sector.

A closed economy has no economic relations with the rest of the world. It includes the three
sectors of the economy namely Household, firms,and government.

11.Discuss briefly the circular flow of income in a 2-sector economy with the help of a
diagram.

The circular flow of income refers to a cycle of generation of income in the production
process, whereby the income flows first from the firms to the households in the form of factor
payments and then, from the household to the firms in the form of consumption expenditure.
The Circular flow in Two-Sector economy can be better understood with the help of the
diagram below-

The outer loop of diagram shows the real flow, i.e. flow of factor services from households 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.
Thus, we can conclude that the 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 a circular and
continuous flow of money income.

12. What are the assumptions with regard to a simple economy [2 sector]?
Following are the assumptions-

• There are only two sectors in the economy; that is, household and firms.
• Only Household supply factor services to firms.
• Firms will hire factor services only from Households.
• Households spend their entire income on consumption expenditure.
• Firms sell all that is produced to the households
• There is no government or foreign trade.
As a result, we can derive the following, in the case of our simple economy-
• Total production of goods and services by firms = Total consumption of goods a service
by Household Sector.
• Factor Payments by Firms = Factor Incomes of Household Sector.
• Consumption expenditure of Household sector = Income of Firm.
• Hence, Real flows of production and consumption of Firms and households = Money
flows of income and expenditure of Firms and Households.

13.” In a two-sector economy, national product is equal to national income”.


Comment.
In a two-sector economy 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).
In other words, total value of output generated is given to factors of production in the form of
rent, wages, interest and profit for their factor services. So, National product (value of goods
and services produced) is exactly equal to the national income (income generated).

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