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• It is non recurring or irregular in nature. Repair and maintenance of capital stock mean expenditure incurred for maintaining fixed assets and keep them in good working order. (b) Resale in the same year (If car purchased by a car dealer for resale). An economy is in equilibrium when injections match the leakages. 2.

Disposal phase In this phase, the income received by factors of production, is spent on the goods and services produced by firms. Structure of macro economy: As we know, Macroeconomics is concerned with economic problems at the level of an economy as a whole. Any interest in yoga or exercise or play sports regularly? They are motor cars, refrigerators, television sets, washing machines, air-conditioners, kitchen equipments, computers, communication equipments etc. Karnataka Class 12 Commerce Economics Circular Flow Of Income : National income, output, and expenditure are generated by the activities of the two most vital parts of an economy, its households and firms, as they engage in mutually beneficial exchange. (b) It is dynamic in nature, i.e., it can be changed. • Transfers made from the income of the payer and added to the income of the recipient (who receive) for consumption expenditure are called current transfers. (iii) These two sectors are dependent on each other in the following ways:

12. (i) Further processing; or In research and exploratory activities (like oil exploration in different parts of India by the Oil and Natural Gas Commission) or improving the technology of a particular production process. (i) Profits: These are flow variables as it is measured over a period of time. 8. Stock. • Business expenses of the employees on tours and entertainment. Share this article with your friends! For example, Indian Embassy in Russia is a part of the domestic territory of India. 8. (i) Personal consumption; or (ii) Investment For example, replacement of the tyres of a truck is an intermediate consumption, but not the replacement of its engine.
Jot down your answer and then follow the EQUILIBRIUM link. Within this limit, wheat and flour are intermediate goods. These goods give indirect satisfaction to a consumer. Investment It is the process of capital formation by a firm or increase in the stock of existing capital stock. (i) Production boundary plays a vital role to differentiate between intermediate and final goods. (a) Citizenship is basically a legal concept based on the place of birth of the person or some legal provisions allowing a person to become a citizen. 9. These are coded ‘X’ for exports and ‘I‘ for investment and are called injections as the money returns into the circular flows. For example, cars, television sets, bread, furniture, air-conditioners, etc. An injection is any expenditure not originating in the household sector, including investment, government spending and exports. productive processes. On the other hand, some firms make and sell exports overseas, and others borrow money and invest it in their firms in the form of capital goods. Figure 5 Circular flow – 3 sector, open economy. (i) Losses: These are those flows as it is measured over a period of time. Just how big a player do you think the government is in the economy? Select The Appropiate Telegram Channel and Get Fastest updates.. Australia, etc. (i) Current transfers (ii) Capital transfers Final goods: These are those which are used for: (c) There is a difference between the terms normal resident (resident) and citizen (or national). But, it is a Money flow, if we study it in terms of the market value of the goods produced. 3. Think about it, then click CENTRALLY PLANNED. Look again at the circular flow model for a three-sector economy. … It shows the redistribution of income in a circular manner between production unit and households.
This sector consists of all those institutions that are engaged in the borrowing and lending of money, acting as the intermediaries between those who save, and borrowers of money. As a reward for supply resources such as labour and enterprise to firms, individuals receive incomes – rent, wages, interest and profit. (b) In other words, intermediate goods are the ones, which require further processing and are not available in an economy for the purpose of consumption. expenditure on fixed assets or on inventory stock. Do some research now and try to find what proportion of national income in your country is taken up by government expenditure. Sharing is caring!

Thus, the basis of classification between these two goods is not the commodity itself, but the use made of it.

(b) Money/Monetary/Nominal Flow (i) Money flow refers to the flow of factor income, as rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services as shown in the flowchart. (b) The above definition is based on the criterion “freedom of circulation of persons, goods and capital”. (e) Research and development This starts to show us some possible policies to promote growth – policies that help boost exports or investment will lead to more injections into the circular flow and therefore boost national income. It refers to flow of money, income or the flow of goods and services across different sectors of the economy in a circular form. Factor income: Income earned by factor of production by rendering their productive services in the production process is known as Factor Income. Get XI & XII Commerce video classes from CAKART.in. 10. (c) There is time dimension in flow variables. There are two types of Circular flow: air-fields and submarines used to produce goods and are ready for sale in the market (ii) Resale in the same year, then it is known as intermediate good.

(b) … Depreciation is also called consumption of fixed capital. (b) Investment or capital formation (like building, machinery purchased by a firm) Are you planning to attempt mock tests conducted by external bodies- ICAI, ICSI, ICMAI or other institute? Ans. Individuals and businesses are interdependent. Add this to the earlier model and we get the model of a 3-sector, open economy, the most common type of economy in the real world. Similarly, the Indian embassy in Washington is a part of economic territory of India. (ii) Let us consider a simple economy consisting only of 2 sectors: Depreciation Reserve Fund: It is a fund created by the producers to meet the upcoming depreciation losses in the process of production. In almost all economies, the government plays an active part. Concept of Depreciation: It is the loss of value of fixed assets in use on an account of normal wear and tear, normal rate of accidental damages and expected or foreseen obsolescence. Cakart.in provides India’s top Class 12 Commerce  faculty video classes – online & in Pen Drive/ DVD – at very cost effective rates. 4. (ii) Factor Payments by Firms = Factor Incomes of Household Sector. • Producers supply goods and services to the households. How important it is for you to pass the exam in this attempt? Savings are coded as ‘S‘. Yes, another 2-sector economy. However, it’s not necessary that all purchases by one production unit from other production units are intermediate purchases. Give reasons and categories the following in stock and flow, (i) Losses                         (ii) Capital, (iii) Production              (iv) Wealth                                                        (Delhi 2011 c). For example the U.S. embassy in India is a part of economic territory of the U.S.A. 10. It may be open or closed. The circular flow means the unending flows of production of goods and services, income and expenditure in an economy. (i) Real flow of income implies the flow of factor services from the household sector to the producing sector and corresponding flow of goods and services from the producing sector to the household sector. The circular flow shows that some part of household income will be: Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output). (ii) Household supply factor services to firms. It can be better understood with this diagram, Phases of Circular Flow of Income: There are three different phases (generation, distribution and disposal) in circular flow of income, as shown in the given diagram. (a) Basis of Classification: If a good is used for: (v) Firms sell all that is produced to the households. The government is the firms, as all firms are owned by the government (state). Important Note – Preparing for XI & XII Commerce? (b) Money Flow Quality is much better than local tuition, so results are much better. 1. (ii) Capital Transfers (iii) Officials, diplomats and members of the armed forces of a foreign country. As we have already seen, a free market economy consists of two components, or sectors, as they are called. 1. (ii) According to the production boundary, if a good crosses the imaginary line around the production unit and reaches to final consumer or investment made by a producer within the imaginary line of production unit, it is known as final good. CAKART provides India's top XI & XII Commerce faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Scope of Economic Territory : (a) Political frontiers including territorial waters and airspace. Flow: These are defined as any quantity measured per unit at a particular period of time. (iii) Consumption expenditure of Household sector = Income of Firm. It is the loss of value of fixed assets in use on an account of normal wear and tear, normal rate of accidental damages and expected or foreseen obsolescence. (i) Fixed investment In a specific time period (generally in an accounting year), the increase in the stock of fixed assets of the producers is termed as fixed investment. (i) Market for goods and services, that is product market. Its main instruments are aggregate demand and aggregate supply. Ans. Examples are clothing, furniture, electrical appliances like fans, electric irons, hot plates and crockery. Structure of Macroeconomics implies study of different sectors of the economy. Keeping in view the educational needs of our country, in general, and state in particular the policies and programmes have been geared to cater to the needy. Note: Households are taken as the owners of factors of production. (a) Personal consumption (like bread purchased by consumer household), or This is the circular flow.

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