Circular Flow of Economic Activity Your instructor will assi

Circular Flow of Economic Activity

Your instructor will assign you to be a part of a group of business or a group of households.

Consider the following questions:

What goes into your decision to work (for households)?

List three different issues that influenced your decision.

Solution

Circular Flow of Economic Activity

1. Real Flow:- Producers supply goods and services to the Households, and Households (as the owners of factors of production) supply factors of production (or factor services) to Producers in form of Land, Labour,capital and entrepreneurship.

2. Money Flow:- refers to flow of factor income, viz., Rent, profit, interest and wages from producing sectors to household sector as monetary reward for their factor services (land, labour, capital and entrepreneurship). The households spend their incomes on goods and services produced by the producing sector. Accordingly, money flows back to the producing sector as household expenditure.