Question

Explain how production flow, income flow , and expenditure flow in an economy are related to each other ? (In about 250 words)

Answer 1

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Thats your answer was minimum 250 words..
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Production of goods and services is the result of the combined effort of the factors of production - labour, land, capital and entrepreneurship. As we know, firms undertake production. In the process of production, output is generated. By selling this output firms receive income. The income generated in production units, from the production process, is distributed among the factors of production as rent, wages, interest and profit. Income in the hands of the factors of production gives rise to demand for the produced goods and services. Thus, households (the supplier of factor services) spend their incomes on the purchase of goods and services produced by firms to satisfy their wants. In other words, households make expenditures or dispose off their incomes. This expenditure, in tum, goes back to the firms, as their revenue.

From the above discussion it is clear that production generates income, which creates expenditure. This expenditure, in tum, leads to further production, as producers ate motivated to produce more, when there is a demand for their product.

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