Depreciation is also called consumption of fixed capital. (i) Market for goods and services, that is product market. (All India 2012; Delhi 2011). (ii) International organizations like UNO, WHO, etc. There are two types of transfers: 12. â¢ This is a Money Flow from other sectors to the producer sector. Capital spending by firms, i.e. 9. For example the U.S. embassy in India is a part of economic territory of the U.S.A. Not all income is spent, however. Examples of these transfers in kind are food, clothing, medicines, vegetable oils, butter, toys sent by the government of one country to the other in times of natural calamities or as a token of goodwill and friendship between two countries. An economy is in equilibrium when the rate of injections = the rate of withdrawals from the circular flow. (b) Money/Monetary/Nominal Flow (b) Expenditure on Military Equipment missiles, rockets, bombs, warships, submarines, military aircrafts, tanks, missile carriers and rocket-launchers etc. (Delhi 2013), (i) Capital (ii) Saving, (iii) Gross Domestic Product (iv) Wealth. (i) Real flow: The flow of factor services from households to business and flow of goods and services from business to households is known as real flow. 8. (c) It is included in National Income as it contribute something in the flow of goods and services. But in national income accounting, the term domestic territory is used in a wider sense. Note: Households are taken as the owners of factors of production. 8. Stock. â¢ Non-durable goods: Goods which can not be used again and again, i.e., they lose their identity in a single act of consumption are known as non-durable goods. Examples: Old Age Pension, Scholarship, Unemployment allowance. e.g. (i) Losses: These are those flows as it is measured over a period of time. These are foodgrains, milk and milk products, edible oils, beverages, vegetables, tobacco and other food articles. We will be looking at the actions and behaviour of firms and households, and how governments interact with them. Try drawing a circular flow for a 2-sector closed economy and then click on 2-CLOSED to check your answer. (b) It is dynamic in nature, i.e., it can be changed. Based on âfreedomâ criterion, the scope of economic territory is defined to cover: Money flow (nominal flow): Money flow refers to the flow of factor income, as rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services. The government is the firms, as all firms are owned by the government (state). â¢ Business expenses of the employees on tours and entertainment. (b) It means, Indian citizenship can arise in two ways: For example, investment grant, capital gains tax, war damages, etc. â¢ It is non recurring or irregular in nature. Military vehicles and light weapons. (ii) A person is treated resident of a country on the basis of economic criterion. (ii) According to the production boundary, if a good crosses the imaginary line around the production unit and reaches to final consumer or investment made by a producer within the imaginary line of production unit, it is known as final good. Financial institutions are needed for individuals and firms to be able to undertake saving and investment. In research and exploratory activities (like oil exploration in different parts of India by the Oil and Natural Gas Commission) or improving the technology of a particular production process. 6. (i) Current transfers (ii) Capital transfers It is given the code ‘M‘ for imports. Quality is much better than local tuition, so results are much better. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. Similarly, planes operated by Malaysian Airlines between India and Japan are a part of the domestic territory of Malaysia. They cannot be seen or touched, i.e., they are intangible in nature. Karnataka Class 12 Commerce Economics Circular Flow Of Income : The five-sector circular flow model describes the operation of the economy and the linkages between the main sectors in the economy. (c) There is no time dimension in stock variables. This is a 2-sector, open economy. 3. The standard codes used in this model, and in economics in general are: The circular flow model of an economy is very useful within the study of economics. (ii) Net investment: It is the increase in stock of capital during an accounting year. They are motor cars, refrigerators, television sets, washing machines, air-conditioners, kitchen equipments, computers, communication equipments etc. Savings are coded as ‘S‘. (b) Production Boundary â¢ Household Sector. Karnataka Class 12 Commerce Economics Circular Flow Of Income : The circular flow of income is a way of representing the flows of money between the two main groups in society – producers (firms) and consumers (households). Households sell their factor services to firms (in the factor markets) and in exchange receive wages (the left hand side of the flow). Net Investment = Gross Investment – Depreciation. (v) Firms sell all that is produced to the households. 2. (b) In other words, final goods are those, which require no further processing and are available in an economy for consumption purpose or investment. 8. 12. Many students find the subject difficult because they don’t have CBSE Class 12 Macroeconomics chapter wise notes. number of machines in a plant, amount in the bank account on a specific date, etc. 8. This money is spent on food, clothing, transport, entertainment etc, and so it returns to the firms. 10. For example, Indian Ships moving between china and India Such an economy described above has two types of markets. Figure 5 Circular flow – 3 sector, open economy. It is also termed as new capital formation. (ii) Distribution Phase: It means the flow of income in the form of rent, interest, profit and wages, paid by producer sector to the household sector. 3. Individuals and businesses are interdependent. whose function is to release weapons. Real flow or physical flow: Real flow of income implies the flow of factor services from the household sector to the producing sector and corresponding flow of goods and services from the producing sector to the household sector. (iv) International bodies like World Bank, World Health Organisation or International Monetary Fund are not considered residents of the country in which these organisations operate but are treated as residents of international territory. 4.Explain the circular flow of income. 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