Macroeconomics &Ad
40 circularityin the
flow of
flow of income
refers to the
between different sectors
o production,
(he i
Hence, the
circular
expenditure in an
economy making
a close link
income :
two-sector
Simnple economy economy
national sector
2.5.1. Circular flow of
household
exist only two sectors, viz., the
sectors will lead
to a circular
flow of and
(say,M) the
economy, if there these two
In a simple then transaction between
produces goods,
andthese are consumed by the
sector (say, F), sector 'F-sector makes wage payment to t
Fig-1. Herethe F' and the
IS showninsupplieslabourto the F- sector,
hand, the
'H-sector makes payment for
ihe
H-sector
labour power. On the other
flow of gy«dst
tor purchasing the F-sector. Thus, this circular H
from
purchase
income can be
measured in three
ways :
Pofgrioceds
(1) By estimating
the total
generated during a
value of goods and services
given time period
(also consid Go ds
eredas the real flow); those
totalexpenditure made by
(i) By estimating the
that time period (also
considered as
sectors during corresponding to the real flow);
the money flow F
and units of
estimatingthe income of all earning Fig.-1
(1i) By that time period.
these two sectors during services acroSs different sectors of
an economy. On
of goods and
The realflow implies the flow
indicates the flow of money (in the form of expernditure on varo
other hand, the money flow economy.
different sectors of the
goods and services) across simple diaerm
the money flow of income can be shown with the help of a
The real flow and
[Fig-2). purchasinglabour power from the 'H-sectr
spends 10 crore for
Let us assumethat the 'F-sector that time span will be 10 crore. The 'H-Sector in tum, wou:
So,the income of the 'H-sector within
purchasing goods produced by the 'F-sector. Hence, that amount again flows
spend that amount on F-sector will be 10 crore. Here, we
have assumed that the
to the F-sector, and the income of the
Real Flow
Money Flow
Household Sector
PComricodeity
MoWanegye spo
Firm Sector
Fig.-2
Macroeconomics & Advan
42
economy'
Circular flow of income in a three-sector
2.5.2.
cinular flow of incomein a simple
two-sector
econoy
co
So far, we have
expenditure
considevd
made by the
the
and Fim'tosector.
govemment
sector purchase us now
Letgoods introduce the 'Government'
and services can be denoted by 'G sectorand s.1
only the Houschold'
denoted by "T
through the imposition of tax can be H
govemment
evenue carning of the
when a part of income is spent
arise as income of another firm or household. So,
of spending by
on tax payment then that part this tax payment is
any
does
houeholderafi
considered
cannot
flow of income. So, if any sector not spend
Ieakage'or'withdrawal' from the circular payments, then that part of :of all of t
goods and services or for factor
income to purchase
withdrawn from the circular flow and it is called a leakage from the circular flow. However, wte
the govemment spends an amount of Gto purchase goods and services produced by any er
(sav the Firm' sector), then income earned bythe 'Firm' sector does not depend on the experdit
made by the Household' sector. So, the government expenditure(G) can be termed as the 'injection
into the circular flow. Thus, when income of any sector does not depend on the expenditure ,
another sector, there takes place an 'injection' into the circular flow.
Household
sector
services
factor
xpayme
Government
sector Supad (9)
Govt. spen
i After-tax
Firm sector
Fig.-4
In Fig.-4, we have shown the
circular flow of income in a 'three-sector
2.5.3. Circular flow of income in a four-sector' or economny'.
Let us now introduce the 'Banking' five-sector' economy'
sector and the 'External' or 'Foreign'
of income. In this case, a part
of income may be kept Sector in this Circular tiew
savings will be considered as a leakage or with the banking sector as 'savingss(S). Herne
when any firm takes loan from the banking withdrawal from the circular flow. On the other han
as an 'injection' into this circular flow. sector for 'investment'(I) then consider
this part can be
Similarly, when a part of income is spent for
countries, then ´import payments' (M) can be importing some goods and services
foreg
trom
other hand, the export earnings (X) of considered as a"leakage' from the circular flow.foreg On t
the
households or firms. So, 'export earnings' can firm sector depends on the expenditure of tew
be
Therefore, total leakage or withdrawal from the considered as an "injection' intothe
circular
and total injection into the circular flow =S + M+T
circular flow =I+X+G
The leakeges from the circular flow reduces the flow of national income. On the other hand, th
injections into the circular flow inflates the natic - flow
Measuring National Income : Some Related Concepts 43
c o n t
in national income. On the other hand, 'injections refer to the inflow of such an arnount
r a c t i o n
of fund in the. circular flow that leads to an expansion in national income. Thus,
+ M+ T) >(| + X+ G) National income falls
(a) if(S
if(l + X+ G) >
(S ++ M+G) ’ National income rises.
(b)
if (S + M+ T) =(1 + X+ G) =’ National income remains unchanged (at equilibrium)
Household
sector Import payments (M)
vices
factorsery Savings
Banking S•INIsspoo
10}
paid
for sector
investment () External
comeinco, After-tax sector
Government Govt spending,
()
p a y m e n(
tr)
sector
Export
earnings
(X)
Firm sector
Fig.-5
external sector.
five-sector (ií you exciude
flow of income in a
have shown the circular
n Fig.-5, we four-sector model) economy.
I becomes a national income methods ot measurg
basically three
Measurement of There are the come
2.6. in different ways. the value added method), (2)
measured known as
National income can be product method (also these methods is discussed below
national income : (1)e xthe method. Each
of
ditterent eanbers ot
penditure
method,and (3) the method produced by
products gives u n
value-added)
2.6.1. Product (or census of all Sum total ot thee Value their oney
complete the
method, a account, and wuts, u
In this product census year is taken into servioes are neasured n difterent
a nation during a given different goods and thee
by other frus, And
estimation of GNP. Since are used ds puts
other tirns it we
terely
value is taken into some firns yet
consideration.
of inputs by would
outputs
used as obtain d total that
stages and also woulkt
Production occurs nproduce outputs which ar
by all firms, we output by just dddug the
other firms In turn of outputs
prduced
nestinating the
naticns
multiple
countng
add up the market values which arises
double countng or
GNP The error called as the error of
exceed of the
