question_answer

Giving reasons categorise the following into stock and flow:

(i) Capital

(ii) Saving

(iii) Gross domestic product

(iv) Wealth

Or

Explain the circular flow of income.

Answer:

(i) Capital is a stock. This is so because capital is measured at a point of time.

(ii) Saving is a flow. This is so because it relates to a period of time.

(iii) Gross domestic product is a flow because it relates to a time period which is generally one fiscal year.

(iv) Wealth is a stock because it is measured at a point time.

Or

The flow of production, income generation and expenditure involving different sectors of the economy in the form of wages, rent and dividends, is known as circular flow of income (see diagram). Production gives rise to income (factor incomes), which in turn gives rise to demand for goods and services. This demand leads to expenditure by households on goods and services produced. In this way income generated by production units reaches back to production units and makes the circular flow complete.