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Question
Draw a well labelled diagram of two sector model of a circular flow of income including the financial sector.
Solution
Two sector model of a circular flow of income includes firms and households. Following diagram shows the circular flow of income in a two-sector model with the financial sector. Financial institutions such as banks, mutual funds, insurance companies etc. are collectively called the financial sector.
In the upper part, the resources such as land, capital etc. flow from households to business firms and in opposite direction to this, money flows from firms to households in the form of factor payments.
In the lower part, money flows from households to firms as consumption expenditure made by the households on the goods and services produced by the firms, while the flow of goods and services is in opposite direction from business firms to households.
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Circular Income Flow in a Two Sector Economy: In the figure given we can see that upper loop shows the resources such as land, capital and entrepreneurial ability flow from households to firms in the direction shown by the arrow direction.
The money flows from firms to the households as factor payments in the form of wages, rent, interest and profits, shown by the arrow direction.
The lower part of the figure shows the flow of money from households to firms in the form of consumption expenditure done by the households to purchase the goods and services produced by the firms, making the flow of goods and services from firms to households.
Thus, we see that money flows from business firms to households as factor payments and then it flows from households to firms. Thus, there is, in fact, a circular flow of money or income. This is how the economy functions.
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Read the below case and answer the question that follow:
Circular Income Flow in a Two Sector Economy: In the figure given we can see that upper loop shows the resources such as land, capital and entrepreneurial ability flow from households to firms in the direction shown by the arrow direction.
The money flows from firms to the households as factor payments in the form of wages, rent, interest and profits, shown by the arrow direction.
The lower part of the figure shows the flow of money from households to firms in the form of consumption expenditure done by the households to purchase the goods and services produced by the firms, making the flow of goods and services from firms to households.
Thus, we see that money flows from business firms to households as factor payments and then it flows from households to firms. Thus, there is, in fact, a circular flow of money or income. This is how the economy functions.
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Read the below case and answer the question that follow:
Circular Income Flow in a Two Sector Economy: In the figure given we can see that upper loop shows the resources such as land, capital and entrepreneurial ability flow from households to firms in the direction shown by the arrow direction.
The money flows from firms to the households as factor payments in the form of wages, rent, interest and profits, shown by the arrow direction.
The lower part of the figure shows the flow of money from households to firms in the form of consumption expenditure done by the households to purchase the goods and services produced by the firms, making the flow of goods and services from firms to households.
Thus, we see that money flows from business firms to households as factor payments and then it flows from households to firms. Thus, there is, in fact, a circular flow of money or income. This is how the economy functions.
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Read the below case and answer the question that follow:
Circular Income Flow in a Two Sector Economy: In the figure given we can see that upper loop shows the resources such as land, capital and entrepreneurial ability flow from households to firms in the direction shown by the arrow direction.
The money flows from firms to the households as factor payments in the form of wages, rent, interest and profits, shown by the arrow direction.
The lower part of the figure shows the flow of money from households to firms in the form of consumption expenditure done by the households to purchase the goods and services produced by the firms, making the flow of goods and services from firms to households.
Thus, we see that money flows from business firms to households as factor payments and then it flows from households to firms. Thus, there is, in fact, a circular flow of money or income. This is how the economy functions.
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- Payment of indirect taxes by a firm.
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- Payment made by a Japanese tourist for goods purchased in India.
- Broker's commission on the sale of second hand goods.
On the basis of the figure given below, identify the type of flow indicated by B and D:
