CIRCULAR FLOW OF MONEY INCOME AND BE SUCCESSFUL, WITH THE STEPS
The circular flow of income or circular is model of the economy in which the major exchanges are represented as flow money, goods and services etc between economics agents, the flows of money and goods and exchange in a closed circular correspond in value, but run in the opposite direction.
MEANING OF CIRCULAR FLOW OF INCOME
Meaning of circular flow of income, it refers to the income in production process, its distribution among the factors of production and finally, it’s circulation from households to firms in the form of consumption expenditure on goods and services produced by them.
TYPES OF CIRCULAR FLOW OF INCOME
Circular flow of income can be depicted in two sectors.
- Household and
- Firm.
THE FOUR MODELS (FORMS) OF CIRCULAR FLOW OF NATIONAL INCOME AND IT’S SIGNIFICANCE ARE: (a) Circular flow of income in a two sector economy
(b) Introduction of capital market (financial system)
(c) Introduction of Government sector (circular flow of income in a four sector economy).
The structure of macro economy is given by the circular flow of income and output. National income accounting has it’s foundation in the model of circular flow.
Circular flow of income can be depicted in two sectors (Households and Firm and Government and Rest of the world) models.
A) CIRCULAR FLOW OF INCOME IN A TWO SECTOR ECONOMY
Let us start with a simplified model involving two sectors namely, household sector and firm sector; assuming that there no government, We further assume that the economy is a closed having no exports or imports similarly, there is no saving by the household, who spend all what they earn and no investment by the firms such an economy has two types of markets – Product market and Factor market under these presumptions the firms sector hires factor services from households who are owners of factor services from households who are owners of factors of production(Land, Labour, Capital and enterprise) for producing goods and services and pays them remuneration (or compensation) in the form of money for rendering the productive services.
For the factors of production, these are factors income known as rent, wage, interest and profit which as be generated in the production process thus, money income flows from the firm sector to the households purchase from the firms, manufactured goods and service to satisfy their want will the result that the same money flow back from household to the firm sector thus, the entire income of the economy come back to firms in the form of sale revenue. The counter flow of money from household to the firm leading to the circular flow of money between the two sectors is represented in flowing diagram.
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Consumption expenditure on goods and services
Production Market
Circular Flow of income in a two sector
B) INTRODUCTION OF CAPITAL MARKET (Financial system)
We now drop the above mentioned assumptions one by one and move a step further by bringing in the role of capital market consisting of financial institutions are primary intermediaries between savers and investors (or lending and borrowers). All lending and borrowings are channelled through capital market in practical life, whatever is earned by the households in not spent on consumption goods.
A part of earning is saved and deposited in the capital market leading the capital market. Similarly, firm also saves with the aim of meeting cost of depreciation and expanding it’s production capacity, finance their investment in plant and equipment thus savings of the firms going to the capital market and borrowing by the former from the letter also create money flows as shown in the following diagram.