the flow of production, income & expenditure never stops.it is a circular flow without a beginning or an end

1. CIRCULAR FLOW
OF ECONOMIC
ACTIVITIES
THE FLOW OF PRODUCTION, INCOME, & EXPENDITURE
NEVER STOPS . IT IS A CIRCULAR FLOW WITHOUT A
BEGINNING OR AN END.

2. •PRODUCTION
Any process that creates value to the already existing goods is
called production
•CONSUMPTION
It means the use of utility of goods & services for the direct
satisfaction of individual and collective wants
•INVESTMENT OR CAPITAL FORMATION
It is that part of production during a year which is not
consumed but served as capital formation for further
production

4. 1. REAL
CIRCULAR
FLOWS
which show the
flow of goods &
services from
one sector to
another
REAL
FLOW
HOUSEHOLD
SECTOR
PRODUCING
SECTOR

5. 2. THE
MONETRY
CIRCULAR
FLOWS Which
show the flow of
money & income
from one sector to
another MONETARY
FLOW
HOUSEHOLD
SECTOR
PRODUCING
SECTOR

6. 1. TWO SECTOR MODEL
It studies the circular flow of income between
 Household sector &
 Producing sector
On the assumption that there are only two sectors in the
economy

7. 2. THREE SECTOR MODEL
It refers to the study of the circular flow of income among
 Household sector
 Producing sector
 Govt. Sector
On the assumption that there are three sectors
It is a closed economy
2. FOUR SECTOR MODEL
It implies the study of the circular flow of income among
 Household sector
 Producing sector
 Govt. Sector
 Foreign sector
It is a open economy

8. 1. IT HIGHLIGHTS THE STATE OF
INTERDEPENDENCE IN THE ECONOMY
All sectors household sector, business sector, government
sector & foreign sector are mutually interdependent &
complementary to one another in such a way that economic
activity remains intact
2. IT SHOWS THE STATE OF EQUILIBRIUM IN THE
ECONOMY The circular flow demonstrate the position of
equilibrium in the economy. If there is any distortion in the
circular flow , the economy will be in disequilibrium & the
smooth functioning of the economy will be disturbed

9. 3. ESTIMATION OF NATIONAL INCOME.
National product or national expenditure can be
estimated with the help of circular flow. GDP can be
estimated by aggregating the market value of the final
goods & services produced in a year. By adding to it net
factor income from abroad one can estimate gross
national product. By adding all the factors of production
in the household sector one can calculate national
income

10. 4. TRIPLE IDENTITY OF PRODUCTION ,
INCOME & EXPENDITURE The aggregate of
the mkt. value of final goods & services produced in
a year by the producing sector is known as national
product. This product is received by the households
in the form of factor income. This income is spent by
he household sector on consumption goods, by the
producing sector on investment, by the govt. Sector
on goods & factor services , in the rest of the world
sector , the flow of income is reflected in terms of net
exports of goods & factors as well as non-factor
services. Its aggregates constitutes national
expenditure. In this way, circular flow establishes that
PRODUCTION = INCOME = EXPENDITURE

11. PREPARED BY:
PRIYANKA SHARMA
MBA-37-2K14