| Question | 3. What is meant by circular flow of income? Distinguish between Real flow and Money flow. |
| Class | Class 12 |
| Subject | Economics (Macroeconomics) |
| Category | Class 12 Economics Solutions Sandeep Garg |
Q.3 What is meant by circular flow of income? Distinguish between Real flow and Money flow.
Solution:-
Circular flow of income represents the flow of money among the different sectors of an economy.
In two sector model, The Circular flow of income depicts the flow of money between household and firms. Households receive payments for the factor services and use that money for consumption expenditure. Whereas, firms produces goods and services with the help of factor services and make factor payment to the households.
| BASIS | REAL FLOW | MONEY FLOW |
| Meaning | Real Flow refers to the flow of factor services from household to firms and flow of goods and services from firms to households. | Money Flow refers to the flow of factor payments to household by firms and flow of consumption expenditure from household to the firms. |
| Other Name | It is also known as Physical Flow. | It is also known as Nominal Flow. |
| Involvement of Money | No money is involved in this flow. | It involves exchange of money. |
| Magnitude of Growth process | This flow determines the magnitude of growth process in economy. | This flow does not determine the magnitude of growth process in the economy. |
Short Questions – Sandeep Garg Macroeconomics Class 12 Solutions Circular Flow of Income
- Explain Circular flow of income in two sector economy.
- What are the different phases of a circular flow of income.
- What is meant by circular flow of income? Distinguish between Real flow and Money flow.
- “Households and Firms depend on each other in the circular flow of income. Justify the statement in case of a two-sector model.
- Distinguish between Stock and Flow. Give an example of each.
- Discuss briefly, the circular flow of income in a two sector economy with the help of a suitable diagram.