![]() Production concerns the entire demand and supply of goods and services. What are the three primary income flows of an economy?Īnswer: Total production, income, and spending are the three ways income flows in an economy. When required, Mary purchases furniture from the XYZ company. The XYZ company produces furniture like chairs, tables, etc. Mary is a real estate owner who has lent her land to the XYZ manufacturing industry. The money goes to the producers, and factory owners, eventually completing the circular flow. Once the final ketchup bottles are in the market, the households purchase the ketchup bottles using wages, rent, or profits. As a result, the households enjoy monetary compensation for the rented industrial land, farmers profit from selling tomatoes, and the laborers get wages. The money spent on necessities by the citizens returns to the firms, which explains the Circular Flow of Income.Įxample of Circular Flow of Income Example #1:Ī ketchup factory’s factors of production are tomatoes, industrial land, and laborers. ![]() It is known as an injection, as the money eventually returns to the flow To equalize the leakages, some firms do business outside the country (exports), and some borrow money for investment.The households then partially spend their income on food, clothing, entertainment, etc., and use the rest for savings and buying things outside of the economy (imports), also called leakages.They use the income to pay wages to people who outsource their services to these firms In a free market, companies produce and sell products to earn revenue.Usually, businesses, individuals, and the government runs an economy.Its analysis helps the government determine and adjust its monetary and fiscal policy.Ĭircular Flow of Income- How Does it Work?.The three primary methods involved in the process are value-added, income, and expenditure method.There are two aspects to this concept, namely, real flow and money flow.The circular flow of income explains the flow of money from producers to households and back to the producers.Start Your Free Investment Banking Courseĭownload Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others Key Highlights
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |