Question

Income generated in production units reaches back to production units and makes the circular flow complete”. Justify this statement with proper explanation diagrammatically. ​

Answer 1

Answer:

The flow of production, income generation and expenditure involving different sectors of the economy in the form of wages, rent and dividends, is known as circular flow of income (see diagram). Production gives rise to income (factor income), which in turn gives rise to demand for good and services. This demand leads to expenditure by households on goods and services produced. In this way income generated by production units reaches back to production units and makes the circular flow complete.