Why is the flow of income and product called 'circular flow'?
Why is the flow of income and product called 'circular flow'?
It is because of the following three reasons that the flow of income and product is called circular flow:
(i) Corresponding to each real flow in one direction, there is a money/income flow in the opposite direction. For example: Corresponding to the flow of factor services (real flow) from households to the production sector, there is a flow of factor payments (money flow) from producers to the household sector.
(ii) In a two-sector economy, receipts of one sector are equal to payments to the other sector. If the receipts are less than the payments (or payments are less than the receipts), circularity is bound to be broken at one point or the other.
(iii) Activities of production, income generation, and expenditure never stop in the economy. They keep chasing one another in a circular manner.
Note: Points (i) and (ii) noted above are also known as two basic principles of the circular flow of income.
It is because of the following three reasons that the flow of income and product is called circular flow:
(i) Corresponding to each real flow in one direction, there is a money/income flow in the opposite direction. For example: Corresponding to the flow of factor services (real flow) from households to the production sector, there is a flow of factor payments (money flow) from producers to the household sector.
(ii) In a two-sector economy, receipts of one sector are equal to payments to the other sector. If the receipts are less than the payments (or payments are less than the receipts), circularity is bound to be broken at one point or the other.
(iii) Activities of production, income generation, and expenditure never stop in the economy. They keep chasing one another in a circular manner.
Note: Points (i) and (ii) noted above are also known as two basic principles of the circular flow of income.
