The document discusses the circular flow of income in a macroeconomics context. It describes the circular flow as having three phases: 1) the generation phase where firms produce goods and services using factor services, 2) the distribution phase where factor income flows from firms to households, and 3) the disposition phase where households spend their income on goods and services from firms. It also discusses the differences between real and money flows, stocks and flows, and provides assumptions for analyzing a simple two-sector economy consisting of households and firms.

1. Macro-economics
Ch -1 Circular flow of Income

2. Circular flow of Income
• It refers to cycle of generation income in
production process,it's distribution among
the factor of production and finally , it's
circulation from household to firms in the
form of consumption expenditure on goods
and services produced by them.

3. Phases of circular flow of income
There are three phases given below:-
1)Generation phase:-In this phase, firm produces
goods and services with the help of factor services.
2) Distribution phase:-This phase involve the flow of
factor income(rent,wages,intrest and profit) from
firm to household.
3) Disposition phase:-In this phase, the income
receive by the factor of production, is spent on the
goods and service is produced by firm.

4. Types of Circular flow
1)Real flow:-It refers to the flow of factor service
from household to firm and the corresponding flow
of goods and services from firm to household.
2) Money flow:-It refers to the flow of factor
payment firm to household for their factor services
and corresponding flow of Consumption expenditure
from household to firm for purchase of good and
services.

5. Difference between
Real flow
• It is the flow of good and
services between firms
and household.
• It involve exchange of
good and services.
• It may have difficulties of
barter system.
• It is also known as
Physical flow.
Money flow
• It is the flow of money
between firms and
household.
• It involve exchange of
money
• There is no difficulties in
case of money
flow.difficultie
• It is also known as nominal
flow.

6. Difference between
Stock
• Stock variable refers that
variable, which is measured
at a particular point of
time.
• It does not have time
dimension.
• It is Static concept.
• For example:-Polpulation of
India 31.12.20
Flow
• Flow variable refers to that
variable which is measured
over a period of time.
• It has a time dimension it's
magnitude can be
measured.
• It is Dynamic concept.
• For example:-No of birth
rate during 2020

7. Two sector Economy
In order to make our analysis simple, we take some
assumption:-
1)There are only two sector in the economy that is
household​ and firm.
2) Household sector supplies factor services only to
firm and firm hire factor services only from
Household.
3) Firms produce good and services and sell their
entire output to the household.

8. 4) Household receive factor income for their services spend
the entire amount on consumption of good and services.
5) There are no savings in the economy. Thus neither the
household save from their income , nor the firm saves from
their profit.
Conclusion
Total production=Total consumption
Factor payment=Factor income
Consumption expenditure=Factor income
Real flow=Money flow

9. Leakage and Injection
• Leakage refers to will to withdrawal of money from
Circular flow.
• Injection refers to the introduction of income into
Circular flow.

10. Significance of circular flow
• It helps us to understand the mutual
interdependence among different sector of
economy.It shows that all the sector are
complementary to one another.
• It shows the equilibrium​ position of the economy.If
there is any distrotion in the circular flow, the
economy will be disequilibrium and smooth
functioning of economy will be distributed.
• It helps in identifying various types of leakage and
injection in the economy

11. Thank you