The circular flow refers to the continuous flow of goods, services, and money between two main sectors in an economy: households and firms. There are two types of circular flow - the real flow involving the exchange of goods and services, and the monetary flow involving the exchange of money between households and firms. In a two sector economy, households own factors of production such as labor which they supply to firms, who use these factors to produce goods and services which are then purchased by households using the income received. This continuous exchange of goods, services and money between households and firms is known as the circular flow of income.

1. Prepared By:-
KVS, Delhi Region
It refers to flow of income or
flow of goods and services
across different sectors of an
economy in a circular form.

2. Prepared By:-
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TYPES OF
CIRCULAR FLOW
Product Flow
(Real Flow)
Factor Flow
Product / Goods
Flow
Income Flow
(Monetary Flow)

3. Prepared By:-
KVS, Delhi Region
REAL FLOW
• It refers to flow of factor services
and flow of goods and services.
It consists of:
a) Factor flow, i.e. flow of factor
services
b) Product flow, i.e. flow of goods
and services

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MONEY FLOW
• In a monetised economy the flow of
factor services generates money flows
in the form of factor payments which
take the form of income flow.
• The expenditure on goods and services
take the form of expenditure flow.
• Income and expenditure flows move in
circular manner in an opposite direction.

5. Prepared By:-
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CIRCULAR FLOW OF
INCOME IN A TWO SECTOR
ECONOMY
To present the flow of
income and expenditure
the economy is divided
into two sectors:
•Household sector
•Firm sector

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HOUSEHOLD SECTOR
• They are owners of all
factors of production.
• They receive factor
income.
• They are consumers of
goods & services.

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FIRM SECTOR
• They hire factors of
production from the
households
• They produce and sell goods &
services to the households and
receive income from them.
• They make factor payments to
the households.

8. Prepared By:-
KVS, Delhi Region

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In a simple economy
• Total production of goods and services by
firms = Total consumption of goods and
services by household sector
• Factor payments by firms = Factor incomes
of households
• Consumption expenditure of households =
Income of firms
• Real flow = Money flow

10. Prepared By:-
KVS, Delhi Region
Questions for self-Evaluation
What is circular flow ?
State the difference between Real
flow and money Flow .
Differentiate between factor
income and factor payment.
Explain diagrammatically the
circular flow of two sector
economy.
Who are the owners of factor of
production.

11. Prepared By:-
KVS, Delhi Region
Compiled by:-
• Mrs. Anita Bhardwaj KV , Vigyan Vihar
• Mrs Monika Bajaj KV ,Tagore Garden
• Mrs Leena Singh KV,AGCR
• Mr Sri Keshav KV , no.2 Delhi Cantt
• Mrs Ritu Tanwar KV, AFS Rajokri