This document provides an overview of the circular flow of income model in economics. It defines the circular flow of income as the cycle of generation, distribution, and circulation of income between households and firms. The key sectors in an economy are identified as households, firms, government, and the foreign sector. Households own factors of production and receive income from selling these factors to firms. Firms combine factors of production to produce goods and services and pay income to households. Households then use their income to purchase goods and services from firms, completing the circular flow. The assumptions, workings, phases and types of the circular flow model are also outlined.

1. ECONOMICS
XII CBSE
CIRCULAR FLOW OF INCOME

2. LEARNING OBJECTIVE
 It shows that different sectors of
an economy are interrelated and
interdependent on each other
How the national income is
generated in an economy or how
GDP is calculated.
It signifies that production,
income and expenditure are of
unending nature, therefore,
economic activities in an economy
can never come to a halt.

3. PRESENTATION BY:-
CS. SOHIL GAJJAR
CS, MA [Economics], B.Com.
Co-Founder and Chief
Mentor of
Acumen Education

4. TOPICS TO BE COVERED
1. Introduction
2. Important Sectors of an Economy
3. Definition of Circular Flow of Income
4. Assumptions of Circular Flow of
Income
5. Working of Circular Flow of Income
in Two-Sector Model
6. Phases of Circular Flow of Income
7. Types of Circular Flow of Income
8. Stock and Flow Concept

5. INTRODUCTION
PRODUCTION:- Transformation of inputs
into outputs is known as production.
Production is a continuous process.
Production is done with help of Resources.
These resources are Factors of Production.

6. FACTORS OF PRODUCTION

7. Why Production?
To satisfy the demand of the consumers. The
unlimited and recurring wants of human beings
have made the production process, a continuous
process.
In this process, different factors of production:-
Land, Labour, Capital & Enterprise are combined
together for production of goods and services.

8. IMPORTANT SECTORS IN
AN ECONOMY
1.HOUSEHOLD: They are the owners of
Factors of Production. It includes
consumers of goods and services.
1. Owners of FOP
2. Buyers of Goods and
Services
3. Pays Price [Revenue for
firm] in exchange of
goods and services
4. Sellers of Factor Services in
resource market
5. Receives remuneration
from firm

9. 2. FIRM
It includes all producing units [firms] in the
economy. For the production of goods and
services, the firm hire/purchase factors of
production [land, labour, capital and enterprise]
from the household.
1. Buyers of FOP
2. Pays Remuneration to
FOP in terms of Rent,
Wages, Interest & Profit
3. Sells Goods and Services
4. Earns revenue from
household
5. Buyer of FOP in resource
market.

10. 3. GOVERNMENT
Economic activities in an economy are generally
regulated by the Govt. It also performs different
social, political and economic activities for the
country. Such activities may involve expenditure
which a government meets through collection of
revenue from various sources, including taxes etc.
Taxes are paid by both household and firms.

11. 4. FOREIGN SECTOR [ROW]
It includes all such activities which are
related to export and import of goods and
services and the flow of capital between the
domestic economy and rest of the world.

12. DEFINITION
It refers to the cycle of generation of
income in the production process, its
distribution among the factors of
production and finally its circulation
from household to firms in the form of
consumption expenditure on goods and
services produced by the firm.

13. ASSUMPTIONS OF CFY
1.TWO SECTOR ECONOMY –
HOUSEHOLD AND FIRM
[CLOSED ECONOMY]
2.HOUSEHOLD AND FIRM DO NOT
SAVE
CONSUMPTION = INCOME
3.THE AMOUNT OF SEPENDING BY
CONSUMER BECOMES THE
RECEIPT OF THE PRODUCER

14. WORKING OF CFY
1. Household provides factor services to firm in the form
of land, labour, capital and enterprise.
2. Household receives factor income [rent, wages,
interest & profit] for their service from firm.
3. Households spend entire amount of factor income as
consumption expenditure on goods & services.
4. Firm sells their entire output to the household, which
is produced by firm with the help of FOP.

15. Conclusion of CFY
Total Production = Total Consumption
Factor Payment = Factor Income
Factor Income = Consumption Expenditure
Real Flow = Money Flow
Consumption Expenditure = Firm
Income[Sales Revenue/Value of Output]

16. PHASES OF CFY
1. Generation Phase:- In this phase, firms produce goods and
services with the help of factor services.
2. Distribution Phase:- This phase involves the flow of factor
income from firms to household.
3. Disposition Phase:- In this phase, the income received by
the FOP is spent on the goods and services produced by the
firm.
In this way, income generated in the production units
reaches back to the production units and makes the
circular flow completes.
GENERATION
PHASE
DISTRIBUTION
PHASE
EXPENDITURE
PHASE

17. TYPES OF CFY
Click to edit Master text styles - Standard (4:3)
BASIS OF
DIFFERENCE
REAL FLOW NOMINAL FLOW
Meaning It is the flow of goods and
services from firms to the
households.
It is flow of money between
firms and households.
Kind of
Exchange
Barter Exhange Exchange of money
Alternative
Name
Physical Flow Money Flow
Example The use of labour by a
Producer
Payment of wages in return
for the use of labour
Figure

18. STOCK & FLOW CONCEPT
Differences Stocks Flows
Meaning Stock is an
economic variable
which is measured
at a particular point of
time.
Flow is an economic
variable which is
measured during/over
the period of time.
Time
Dimension
No time dimension. Time dimension as per h
our, per day,
per month.
Nature of
Concept
Static concept. Dynamic concept
Examples National Wealth,
Money Supply
National Income,
Investment

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