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Circular Flow of Income in Simple Economy Video Lecture | Economics Class 12 - Commerce

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FAQs on Circular Flow of Income in Simple Economy Video Lecture - Economics Class 12 - Commerce

1. What is the circular flow of income in a simple economy?
Ans. The circular flow of income in a simple economy refers to the continuous flow of money and goods between households and firms. In this model, households supply factors of production (such as labor) to firms, who in turn produce goods and services. Firms pay wages and other forms of income to households, which are then used to purchase goods and services. This cycle continues, creating a circular flow of income within the economy.
2. How does the circular flow of income work in a simple economy?
Ans. In a simple economy, households provide factors of production to firms, such as labor, land, and capital. Firms use these factors to produce goods and services, which are then sold to households. In return for their contribution, households receive income in the form of wages, rent, interest, and profits. This income is then used by households to purchase goods and services, completing the circular flow of income.
3. What are the main components of the circular flow of income in a simple economy?
Ans. The main components of the circular flow of income in a simple economy are households and firms. Households supply factors of production to firms, while firms produce goods and services that are sold to households. This interaction creates a flow of income from firms to households, and a flow of goods and services from households to firms, forming a circular flow of income.
4. What is the significance of the circular flow of income in a simple economy?
Ans. The circular flow of income is significant as it illustrates the interdependence between households and firms in an economy. It shows how the income generated by firms is distributed to households as wages and other forms of income, and how households, in turn, use this income to purchase goods and services produced by firms. This flow of income and goods forms the basis of economic activity and contributes to the overall functioning of the economy.
5. How does leakage and injection affect the circular flow of income in a simple economy?
Ans. Leakage and injection are two important factors that can affect the circular flow of income. Leakage refers to the withdrawal of income from the circular flow, such as savings, taxes, or imports. These leakages reduce the amount of income available for households to spend on goods and services. On the other hand, injections are additions to the circular flow, such as investments, government spending, or exports. These injections increase the amount of income available for households to spend. The balance between leakages and injections determines the overall level of economic activity in a simple economy.
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