How the circular flow of income helps in national income calculatoin?
Answers
The circular flow of income described above is the most simplistic illustration of the interdependency of two sectors in the economy. However, actual money flows through the economy are far more complicated. Economists have expanded on the ideas of the circular flow of income model to better depict the complexity of modern economies by including more sectors that affect money flow. In addition to the household sector that spends (C) goods and the business sector that produces the goods, two sectors that are also included in the circular flow of income include the government sector and the foreign sector. The government injects money into the circle through government spending (G) on things like welfare programs and infrastructure. Money is also added to the circular flow through exports (X) which involves foreign entities purchasing goods from the economy. Businesses that invest (I) money to purchase capital stocks contribute to the flow of income in the economy.