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Question
Read the below case and answer the question that follow:
Circular Income Flow in a Two Sector Economy: In the figure given we can see that upper loop shows the resources such as land, capital and entrepreneurial ability flow from households to firms in the direction shown by the arrow direction.
The money flows from firms to the households as factor payments in the form of wages, rent, interest and profits, shown by the arrow direction.
The lower part of the figure shows the flow of money from households to firms in the form of consumption expenditure done by the households to purchase the goods and services produced by the firms, making the flow of goods and services from firms to households.
Thus, we see that money flows from business firms to households as factor payments and then it flows from households to firms. Thus, there is, in fact, a circular flow of money or income. This is how the economy functions.
Which of the following is not the significance of Circular Flow of Income?
Options
It reflects structure of an economy.
It shows interdependence among different sectors.
It shows injections and leakages from flow of money.
It does not help in estimation of national income and related aggregates.
Solution
It does not help in estimation of national income and related aggregates.
Explanation:
The importance of a two-sector economy:
- It shows inter interdeputer among different sectors.
- It reflects structure of an economy.
- It shows injections and leakages from flow of money.