Sandeep Garg Macroeconomics Class 12: Chapter 1 Circular Flow of Income

Sandeep Garg Class 12 Macroeconomics Solutions Chapter 1 Circular Flow of Income is explained by the expert economic teachers from the latest edition of Sandeep Garg Macroeconomics Class 12 textbook solutions.

 At BYJU’S, we provide Sandeep Garg Economics Class 12 Solutions to give comprehensive insight about the subject to the students. These insights act as a priceless benefit to students while completing their homework or while studying for their exams. 

There are numerous concepts in economics, but here we provide you with the solution from the chapter, circular flow of income that will be useful for the students to score well in the board exams.

Sandeep Garg Solutions Class 12: Chapter 1: Part B

Question 1

What do you mean by circular flow of income?


The circular flow of income refers to the flow of money, services and goods, and more. This circulation happens in terms of income in the production process, distribution between the factors of production, and at the end the circulation of the product from household to a firm in the form of consumption expenditure on goods and services manufactured by them.

Question 2

Explain the three phases of the circular flow of income.


The three different phases in the circular flow of income are as follows:

Generation phase: In this phase, the firm manufactures the goods and services with the assistance of factor services.

Distribution phase: This phase involves the flow of factor income, which comprises rent, interests, wages, and profit from the firm to the household.

Disposition phase: Here, the income collected by the factors of production is used on the goods and services manufactured by a firm.

Related links: Basic Concepts of Macroeconomics

Question 3

Give two differences between stock and flow with examples.


The two differences between stock and flow with examples are as follows:

Parameters Stock Flow
Time dimension There is no time dimension. Time dimension exists as the magnitude that can be scaled over a period of time.
Nature of concept It is a static concept. It is a dynamic concept.
Examples 1.Total number of Hero Honda bikes in Bangalore

2.National wealth

1.Hero Honda car manufactured during February 2018

2.National income

Question 4

How many types of circular flow are there?


There are two types of circular flow.

Real flow: The term real flow means the flow of factor services from households to firms. Similarly, the flow of goods and services from firms to households.

Money flow: The money flow refers to the flow of factor payments from firms to households for factor services. Similarly, the flow of consumption expenditure from households to firms for the purchase of goods and services manufactured by the firms.

Question 5

Give three differences between real flow and money flow.


The three differences between real flow and money flow are as follows:

Parameters Real flow Money flow
Kind of exchange It includes the exchange of goods and services. It only involves the exchange of money.
Difficulty in exchange It has a lot of difficulties involved in the exchange of goods and services. There are no such difficulties in terms of money flow.
Alternative names It is also known as physical flow. It is also known as nominal flow.


Question 6

Explain the role of the government sector in an economy.


The government sector performs the following activities in the economy.

  • They collect taxes from households and firms.
  • They transfer payments to the households and provide subsidies to the firms.
  • They make the payment for the purchase of goods and services from the firms.
  • They save and borrow money with the help of the financial market.
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