LESSON – 19NATIONAL
INCOME - 1Circular Flow and Measurement of National Income
After studying this unit, you should be able to:
Understand national income
Importance of national income
Define national income accounting
Analyze the circular flow of income
Discover the flow of income in various sectors
Understand different sectors
A. CIRCULAR FLOWS OF INCOME
We have already explained that national income is a flow. This flow can be expressed either interms of goods and services or in the form of money income. The flow is also known as the realflow. The flow of money income is known as the money flow.
Flow of Income in a Two-sector Economy
We will explain the flow of income in an economy by taking a model of simple economy in whichonly two sectors operate viz., household sector and producer's sector or firms, Real flow andmoney flow of income are shown in Figure. The upper loop in Figure shows the real flow in theeconomy. Households supply factor services to the firms'. Business firms by utilising the factor services produce goods and services. Firms provide goods and service_ to households as areward of their factor services, i.e., goods and services flow from firms to households; thisconstitutes the real flow in the economy.Figure of flow of incomeIn the modern economies factor payments are not made in kind hilt in terms of money. Factor-owners, i.e., households, receive their rewards in the form of money, as shown in the lower loopin Fig. 7.1. household utilizes this money to purchase goods and services produced by the firms.Thus money flows from firms to households and again back to the firms. Since the income flow ina circular way between the firms and households, this flow is also known as “Circular flow of income”.