Question

Explain the circular flow of economic activities

Answer 1

Instructions:

• Explain the role of production unit and household

Solution:

• The goods are manufactured in various production units. The household gives money in return to buy them all from the production unit, which is the basic structure of the circular flow of economic activity.
• The production unit requires the land, labour, capital and organisation to work properly. Each of these factors are provided by the household units to the production unit.
• When the production unit requires land, it is given by the household for rent. If the production unit requires labour, the labourers are given by the household for wages.Likewise, capital and organisation are given by the households to the production unit and are rewarded with interest and profit.
• Thus, we can say in return to the factors of production, households are rewarded with rent, wages, interest and profit.
• Therefore , the economic activities flow in a circular manner as the production unit produces and the household unit consumes. This process continues to happen. And this is the circular flow of economic activity.