CIRCULAR FLOWS OF INCOME AND EXPENDITURE MEANING OF CIRCULAR FLOWS OF INCOME AND EXPENDITURE

 Q.1 Explain the concept of circular flows of income and expenditure.

 Ans: Macroeconomics is a study of the economy as a whole. An economy can be defined as an integrated system of production, exchange, and consumption. In carrying out these economic activities, people make different transactions of buying and selling goods and services.

 These economic transactions generate two kinds of flows :

 (1) Real flow

(2) Money flow 

(1) Real Flow: Real flow refers to product flow and factor flow. In other words, the real flow includes the flow of goods and services and the flow of factors of production. In product flow, there is a flow of goods and services from the firms to households. In factor flow, there is a flow of factors of production from households to firms.

(2) Money Flow: Money flow refers to income flow and expenditure flow. In income flow, households get factor incomes from the firms as they provide factor services (land, labor, capital, and entrepreneurship) to the firms. In expenditure flow, households make consumption expenditure on goods and services produced by the firms.

 Thus, there is constant interaction among different sectors of the economy. The entire economic system can therefore be viewed as circular flows of income and expenditure. The magnitude of these flows determines the size of national income.

The circular flow of money refers to the process by which the national income and national expenditure flow circularly continuously through time.

 A continuous flow of production, income, and expenditures in a circular form is known as a circular flow of income. A pictorial illustration of the interrelationships among different sectors of the economy is called circular flows of income and expenditure.