Q.1 Explain the circular flow of income in a two sector model.
1. Real Flow - It refers to the flow of factor services from households to firms and the corresponding flow of
goods and services from firms to households.
2. Money Flow - It refers to flow of factor payments from firms to households for their factor services and
corresponding flow of consumption expenditures from households to firms for purchase of goods and services
produced by the firms. It is also called nominal flow.
3. CIRCULAR FLOW IN A TWO SECTOR ECONOMY
Factor Payments
(Rent, Wages, Interest and Profit)
Factor Services
(Land, Labour, Capital and Enterprise)
FIRMS
HOUSEHHOLDS
Consumption Expenditure
(On goods and services)
Purchase of Goods and Services
Q.2 Differentiate between consumption goods and Capital goods.
Consumer goods or consumption goods
1. These are directly used by ultimate
consumer household for satisfaction of
wants.
2. These are final goods
3. They are not used in production
by
producer.
4. They may be changed during use by
consumer like tea leaves are used to make
tea.
5.eg: Durable goods- car, washing machine
Capital goods
1. These are fixed assets used by the
producers in the production process.
2. These are final goods.
3. They help in production of other goods.
4. They do not change during production
process.
5. eg: machines ,
Plants and equipment used in production
process.
Q.3 What is the difference between Final goods and Intermediate Goods?
Final goods
1. These are ready for final use
by consumer for consumption or
By producer for investment.
Intermediate goods
1. These are not ready for use; they are
for resale or used for further
production.
2.These are:(a)Consumer goods used for satisfaction of
wants. They may change during use.
(b) Capital goods which help in production
process. Thy do not transform during use,;
2.
These are purchased by one firm
from another for following purpose:(a)
Resale during the year
(b)
Use as raw material in production
process. So they may change during
production process
3. Once sold these pass out of production
3. These are inside the production
boundary.
boundary.
4. These are included in national income
4. These are not included in national income.
Q.4 Differentiate between Stocks and Flows variables .
Stocks
1. Stock variables are measured at a particular
point in time.
2. They do not have a time dimension,
3. Eg: Capital stock, inventory, wealth on a
particular day.
4. Stock is static concept
Flows
1. Flow variables are measured over a period of
time,
2. They have a time dimension,
3. Eg: Capital formation during a year, change in
stock, national income during a year.
4. Flow is dynamic concept.
Q.5 Differentiate between Factor income and Transfer Income.
Factor income or Factor payment
Transfer Income or Transfer payment
1.
It is the income received in return for It is the income received without any
rendering factor services by the factors of corresponding services.
production.
2.
These are included in national income.
These are not included in national
income
3.
Example: Rent, wages, interest, and profit.
Retirement pension.
Example: old age pension, scholarship of
students, unemployment allowance, charity
,gifts, expenditure on birthday / Marriage,
pocket money, remittances from abroad,
financial help to earthquake victims, beggars,
meals to beggars, compensation given to
accident victims etc.