Giving reasons, categories the following into stock and flow: (i) Profit (ii) Capital (iii) Savings (iv) Balance in your bank account
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1. Investment It is the process of capital formation by a firm or increase in the stock of existing capital stock.
2. Components of Investment
(i) Fixed investment In a specific time period (generally in an accounting year), the increase in the stock of fixed assets of the producers is termed as fixed investment.
(ii) Inventory investment During a specific time period, (generally an accounting year) the change in inventory stock (i.e. the sum of unsold goods, semi-finished goods and raw materials) is termed as inventory investment, it is also called as change in stock and calculated as closing stock – opening stock.
3. Types of Investment
(i) Gross investment: Gross investment of an economy constitutes that part of our final output that comprises of capital goods, i.e. expenditure on fixed assets or on inventory stock.
Gross Investment = Expenditure on the Purchase of Fixed Assets in an Accounting Year + Expenditure on the Inventory Stock in an Accounting Year.
(ii) Net investment: It is the increase in stock of capital during an accounting year. It is also termed as new capital formation.
Net Investment = Gross Investment – Depreciation
4. Concept of Depreciation: It is the loss of value of fixed assets in use on an account of normal wear and tear, normal rate of accidental damages and expected or foreseen obsolescence. Depreciation is also called consumption of fixed capital.
5. Depreciation Reserve Fund: It is a fund created by the producers to meet the upcoming depreciation losses in the process of production.
6. Inventory: It is termed as the stock of unsold finished goods, semi-finished goods (goods which are in the process of production) and raw materials which a firm carries from one year to the next year. *
7. Stock: These are defined as any quantity measured at a particular point of time, e.g. number of machines in a plant, amount in the bank account on a specific date, etc.
8. Flow: These are defined as any quantity measured per unit at a particular period of time. e.g. income or expenditure over a time period of one month or one year.
9. Circular Flow of Income: The circular flow means the unending flows of production of goods and services, income and expenditure in an economy. It shows the redistribution of income in a circular manner between production unit and households.
10. Phases of Circular Flow Income
(i) Production of goods and services.
(ii) Generation of income in terms of wages, rent, interest and profit.
(iii) Expenditure in terms of consumption and investment.
11. Types of Circular Flow of Income
(i) Real flow: The flow of factor services from households to business and flow of goods and services from business to households is known as real flow.
important-questions-for-class-12-economics-investment-stock-flows-and-circular-flow-of-income-tp2, 11.1
(ii) Money flow The flow of money across different sectors of the economy is temed as money flow. i.e. exchange of factor services by the household for factor payments from firms.
(iii) Injections: It means introduction of income into the flow when households and firms borrow the savings, they constitute injections.
(iv) Leakages: It refers to the withdrawal from the flow, when households and firms save part of their incomes, it constitutes leakage.
important-questions-for-class-12-economics-investment-stock-flows-and-circular-flow-of-income-tp2, 11.2
12. Different Sectors in Circular Flow of Income in an Open Economy
(i) Production sector (ii) Household sector
(iii) Government sector (iv) Rest of the world sector
2. Components of Investment
(i) Fixed investment In a specific time period (generally in an accounting year), the increase in the stock of fixed assets of the producers is termed as fixed investment.
(ii) Inventory investment During a specific time period, (generally an accounting year) the change in inventory stock (i.e. the sum of unsold goods, semi-finished goods and raw materials) is termed as inventory investment, it is also called as change in stock and calculated as closing stock – opening stock.
3. Types of Investment
(i) Gross investment: Gross investment of an economy constitutes that part of our final output that comprises of capital goods, i.e. expenditure on fixed assets or on inventory stock.
Gross Investment = Expenditure on the Purchase of Fixed Assets in an Accounting Year + Expenditure on the Inventory Stock in an Accounting Year.
(ii) Net investment: It is the increase in stock of capital during an accounting year. It is also termed as new capital formation.
Net Investment = Gross Investment – Depreciation
4. Concept of Depreciation: It is the loss of value of fixed assets in use on an account of normal wear and tear, normal rate of accidental damages and expected or foreseen obsolescence. Depreciation is also called consumption of fixed capital.
5. Depreciation Reserve Fund: It is a fund created by the producers to meet the upcoming depreciation losses in the process of production.
6. Inventory: It is termed as the stock of unsold finished goods, semi-finished goods (goods which are in the process of production) and raw materials which a firm carries from one year to the next year. *
7. Stock: These are defined as any quantity measured at a particular point of time, e.g. number of machines in a plant, amount in the bank account on a specific date, etc.
8. Flow: These are defined as any quantity measured per unit at a particular period of time. e.g. income or expenditure over a time period of one month or one year.
9. Circular Flow of Income: The circular flow means the unending flows of production of goods and services, income and expenditure in an economy. It shows the redistribution of income in a circular manner between production unit and households.
10. Phases of Circular Flow Income
(i) Production of goods and services.
(ii) Generation of income in terms of wages, rent, interest and profit.
(iii) Expenditure in terms of consumption and investment.
11. Types of Circular Flow of Income
(i) Real flow: The flow of factor services from households to business and flow of goods and services from business to households is known as real flow.
important-questions-for-class-12-economics-investment-stock-flows-and-circular-flow-of-income-tp2, 11.1
(ii) Money flow The flow of money across different sectors of the economy is temed as money flow. i.e. exchange of factor services by the household for factor payments from firms.
(iii) Injections: It means introduction of income into the flow when households and firms borrow the savings, they constitute injections.
(iv) Leakages: It refers to the withdrawal from the flow, when households and firms save part of their incomes, it constitutes leakage.
important-questions-for-class-12-economics-investment-stock-flows-and-circular-flow-of-income-tp2, 11.2
12. Different Sectors in Circular Flow of Income in an Open Economy
(i) Production sector (ii) Household sector
(iii) Government sector (iv) Rest of the world sector
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