Question

1. Explain the concept of product (real flow) with the help of above diagram. (2m) 
2. Explain the concept of Money flow with the help of above diagram. (2m)

Answer 1

1. The factors of production (land, labour, capital and enterprise) flow from households to firms. The firms use these factors to produce goods and services required by households. The final goods and services flow back from the firms to the households.
2. Money flows from firms to households in the form of factor payments such as rent, wages, interest and profit. Households use this income to purchase goods and services produced by firms. Thus, money flows from the firms to the households and from the households back to the firms.