Real Flow and Money Flow

Transcript

What is Real Flow? It refers to flow of goods and services between different sectors of economy We know that Firms sells goods and Service to Household and Household provides factors of production (Land,labour etc) to Firms FIRM Provides goods Provides Service HOUSEHOLDS Example 1 -Real Flow Suppose a Factory Makes Bread It hires an employee to work in factory Factory doesn’t pay employee any salary It gives 10 bread as his labour charges Factory (Firm) Provides Bread (goods) Provides labour (Factor Service) Employee (Household) Example 2 Real Flow Suppose an IT company takes office on Rent from Landlord IT Company does not pay any money as rent It provides technical service to landlord IT Company (Firm) Provides Technical Service Provides land Landlord (Household) Note Real Flow is also called Physical Flow It is assumed that there is only exchange of goods and services (No money is involved in the transaction) Due to this reason, Problem of Barter (exchange) may arise Other person may not want the goods we are selling What is Money flow? It Refers to flow of Money between different sectors of economy Example 1 Firms pay Households money for use of their Factor Services. This is called Factor Payment and Households pay Firms money for purchase of goods and services. This is called Consumption Expenditure FIRM Makes Factor payment Consumption Expenditure HOUSEHOLDS Example 1-Money Flow Suppose a Factory Makes Bread It hires an employee to work in factory Factory pays Employee Salary for his Service (This is called Factor Payment) With this money,employee purchases goods from firm (This is called Consumption Expenditure) Factory (Firm) Salary (Factor Payments ) Money for purchase of gooods (Consumption Expenditure) Employee (Household) Note Money flow is also called Nominal Flow In this case, since exchange of money is involved There is no difficulty of barter system Money is acceptable to all FLOW REAL FLOW MONEY FLOW Flow of Goods and Services between Different sectors of economy Flow of Money between Different sectors of economy It is also called Physical Flow It is also called Nominal Flow There is concept of Supply of goods and services from firm to Househods and Factor payments from Households to Firms There is concept of Consumption Expenditure of Households and Factor Payments by Firms There is difficulty in exchanging goods and services. There is no such difficulty as money is involved. NCERT Questions No questions in this part Q1 State true or false with reasons. 1. Real Flow is also known as Nominal Flow. -a- False Money Flow is also known as Nominal Flow. Real Flow is also known as Physical Flow. -ea- Q2 Define Nominal Flow. -a- The flow of Money between different sectors of economy is called Nominal Flow. Example 1 Firms pay Households money for use of their Factor Services. This is called Factor Payment and Households pay Firms money for purchase of goods and services. This is called Consumption Expenditure -ea-