Circular+Flow+of+Income


 * The Circular Flow of Income : ** The interrelationship that exit between various sectors of an economy that engage in the economic activities is called the Circular flow of Income.

**Circular flow PPT** **Production :** It is defined as the process through which raw material are converted into output ,using the factor of production .Example ,growing of wheat ,pulses ,cotton ,coffee etc. by farmers ,manufacturing of cars buses ,books ,pens ,education .Production unit also differ form large scale to the small scale production units ,also production units could be based on different ownership ,some units could be owned by private while other by teh government.

**Consumption :** Consumption is defined as a process of utilizing goods and services to satisfy human wants .Principle activity of the householders is the consumption

**Capital formation :** It says as the excess of production over consumption .Capital formation is the amount of production that is stored for the future use. Let us understant this through a simple example-suppose a farmer produces 10 quintals of wheat .this is his production,during the year he uses [concumes] 6 quintals of wheat ,this is his consumption ,the left over is the 4 quintals of wheat is his capital formation so production =consumption+ investment. If suppose consumption increases without a corresponding increase in production,then the economy's productive capacity in the future [capital formation ] will be adversely impacted .If on the other hand capital formation were to increase,it would raise the productive capacity of economy.This would lead to a rise in production levels which in turn would raise the consumption levels of an economy,Thus ,capital formation propels economic growth.

**Flow :** A flow variable is defined as that variable which is measured over a period of time .Eg. a Company's profit and loss ,birth rate and death rate.

Are those variables that are measured at a particular point of time.
 * Stock variable : **

Sectors in an Economy : In macro economics ,modelling,the company is typically categorized into four sectors.They are Households,firms,governments and the rest of the world or external economy.

It owns various factors of production ,they supply thse factors of production to the firms ,in return the households recive the factor incomes from the firms.The money they recive is spent on the goods and services produced by the firms.,consumtion is the primary activity taken by the firms.
 * a.Household : **

 This sector that hires facors of production to produce the goods and services required in an economy,when firm sells the output it gereates income in the production units.This income is given to the factors of production of goods and services is the primary activity of firms ,when we use word firm ,it includes enterprises that are owned by both private and government.
 * b.Firms:**

This sector basically receives taxes from the households and firms.This money is used to provide services such as police,defence,medical facilities ,education etc. so government is the provider of services that improves the welfare of the people.
 * c.Government: **

**d. Rest of the world** This external sector is named as ROW it is ternmed as imports,when the domestic sector sells goods and services to the external economy,it is termed as exports.

These are payments made by the households to firms for the purchase of goods and services ,it also includes the payments made by the firms to the households as factor incomes.
 * Money flow : **

These are the actual flow of goods and services between the households and firms.Firms supply goods and services to households ,whereas households supply factor services to firms.
 * Real Flow: **

**Injections :** Government spending ,investment ,exports are the importnat injections into the circular flow ,Increase in these variables raises the level of economic activity in the economy or magnitude of circular flow **.= I+G+X** **-(Investment + Government +Purchases +Exports )**

**Leakages :**