Question

how production flow, income flow and expenditure flow are related?

Answer 1

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.