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Circular Flow of Income and Expenditure, Macroeconomics Video Lecture | Macro Economics - B Com

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FAQs on Circular Flow of Income and Expenditure, Macroeconomics Video Lecture - Macro Economics - B Com

1. What is the circular flow of income and expenditure in macroeconomics?
Ans. The circular flow of income and expenditure is a model that illustrates the flow of money and goods between households and firms in an economy. It shows how income earned by households from firms is spent on goods and services, which in turn generates revenue for firms. This cycle continues as the income earned by firms is again spent by households, creating a continuous flow of income and expenditure in the economy.
2. How does the circular flow of income and expenditure contribute to economic growth?
Ans. The circular flow of income and expenditure plays a crucial role in economic growth. It shows how the spending of households on goods and services creates demand for products, which leads to increased production by firms. This increased production requires firms to hire more workers, leading to higher income for households. As households earn more income, they have more purchasing power, which further drives economic growth by increasing demand and production.
3. What are the main components of the circular flow of income and expenditure?
Ans. The main components of the circular flow of income and expenditure are households, firms, government, and the foreign sector. Households are the primary income earners and consumers, while firms are the producers of goods and services. The government plays a role in the economy through taxation, spending, and regulation. The foreign sector represents international trade, including exports and imports.
4. How does saving affect the circular flow of income and expenditure?
Ans. Saving is an important component of the circular flow of income and expenditure. When households save a portion of their income instead of spending it, it reduces the amount of money flowing back to firms as expenditure. This reduction in expenditure can potentially lead to a decrease in production and income in the economy. However, saved money can be used for investment by firms, which can stimulate economic growth in the long run.
5. What happens if there is a leak in the circular flow of income and expenditure?
Ans. A leak in the circular flow of income and expenditure refers to any diversion of money from the circular flow. This can happen through saving, taxation, or imports. If there is a significant leak in the flow, such as high levels of saving or high imports, it can lead to a decrease in expenditure and production in the economy. This can have a negative impact on economic growth and may require measures to stimulate the flow, such as government spending or reducing leakages.
59 videos|61 docs|29 tests
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