CBSE Class 12-commerce Macroeconomics Circular Flow of Income and Methods of Calculating National Income

Learn about the Circular Flow of Income and Methods of Calculating National Income from the CBSE Class 12 Commerce Economics chapter National Income Accounting by referring to our revision notes, sample papers, past year papers etc. at TopperLearning.

In this simplified economy, there is only one way in which the households may dispose of their earnings – by spending their entire income on the goods and services produced by the domestic firms. The other channels of disposing their income are closed: we have assumed that the households do not save, they do not pay taxes to the government – since there is no government, and neither do they buy imported goods since there is no external trade in this simple economy. In other words, factors of production use their remunerations to buy 15National Income Accounting the goods and services which they assisted in producing. The aggregate consumption by the households of the economy is equal to the aggregate expenditure on goods and services produced by firms in the economy. The entire income of the economy, therefore, returns to the producers in the form of sales revenue.