Speaker 1: Hi everyone, welcome back to Equipers Classes. This is the series where we are reading the concept of economics from Tamil Nadu's book, but what matters is not the book, but the concepts that we are reading. So if you're interested in economics, and if you want to enhance your basics, I think this is the best series for you. I'll attach the link of the playlist somewhere here and in the description box so that you can see the videos that have already been uploaded. Today, we are going to do circular flow of income where we left yesterday and yesterday we could only cover till stock and flow. So today we'll complete it all together. Okay, so let's start with circular flow of income. What is it? The circular flow of income is a model of an economy showing connections between different sectors of an economy. It shows flow of income, goods and services. So there are different sectors. What is circular flow of income? Circular flow, if we want to see in literal terms, it is circular, it is flow and income. So that means income is flowing circularly. Right? If you can understand, let's read it reverse income is flowing in a circular way. So if I were to develop a two sector model, there's household, okay? Like my home, there's a firm. Yeah, so there's a firm, there's a household. Households are supplying what? The factor, this factor of service, like maybe labor, they are saying, okay, I'm giving you labor. So firm is saying, okay, you're working for me, you're getting wages. Okay, then further, what is happening because of this labor firm has produced goods and services. Right? Labor services, basically, they are giving services, they are getting wages for this, they are getting service payment for this, whatever service they are paying. And then firms are producing goods, firm are giving them goods. They are giving money for the goods, they are paying money for goods. What is happening? This is a circular way. Income is flowing circularly from household to firm. That is why it is a two sector model. Let's read now. Okay, there are three models of circular flow of income representing the major economic systems. There's two sector models, simple household and firms as I just depicted. Then three sector model, it is a mixed and closed economy with household, firms and now government is the new introduction that this is why this is three. But even with the government, government is of our country. So we are not opening up our economy, we are still a closed economy. So this is closed economy. This is also two sector model is also closed economy. Okay, then there is four sector model. It is for an open economy with household, firm, government. And now there's external sector, fourth sector, external sector. And because this is the global sector rest of the world. So that is that means we have opened up our economy. So this is open economy. All right, this much distinction is clear. Now let's see two sector there is household household sector is what household sector is sole buyer of goods and services. And sole supplier of factor of production. So factor of production, they are saying they are getting factor payment in return, then because of their factor services, a firm is producing goods which they are buying, and they're buying goods and services and then they're paying in return that is what is happening. Okay, firms generator of revenue selling goods and services. So yeah, that's clear. You can see this diagram. These are firms. So consumer Okay, so they are getting from household, they are getting factor of production because of which they are giving or they are getting wages, rent and dividend. Okay, guys, also the line in black is what there is one nominal flow even in the circular flow circular flow is categorized into two ways. I'll just share circular flow can be divided into nominal flow. Real flow. Real flow is the flow that concerns money. Nominal flow concerns goods, services, factor services, factors of production, everything. So the black line above and below are showing where the households are giving factors, and in return, they are getting goods and services. So there's no exchange of money in both the black lines. So black lines show you what nominal flow and red lines show you the real flow because firms are getting wages, rent and income and from that wages, rent and dividends, they are paying consumer expenditure for the goods and services. So this is all money flow because of which it is also called real flow. I've just distinguished I don't know if this further clarifies this but yeah, let's read it further. In a two sector economy production and sales are equal and there will be a circular flow of income and goods. The outer circle represents real flow factors and goods. Okay, sorry. Oh, is it I just Yeah, the outer circle represents real flow factors and goods and the inner circle represents monetary flow. Okay, so I exchanged it through I was telling you about the thing. Okay, so goods and services, the black line show you real flow. And the red line show you money flow, monetary flow, okay, real flow is the actual real flow of goods and services and not concerning the money. Okay, so yeah, more money flow factor rises and commodity prices, real flow indicates the factor services flow from household sector to the business sector and in turn goods and services. Okay, I just got confused. I think. Yeah, so forget it. Now see what I've told you the black lines show you the real flow the exchange of goods and services and factors of production, whereas the red line only concerns with the money flow. Okay, now this is the thing. This is actual thing. I confused it earlier and I'm so sorry for that. Okay. And in turn goods and services flow from business sector to household. The basic identities of two sector economy are y is equal to c plus i, national income, total income in the economy is equal to consumption expenditure plus investment, because this is a two sector economy. Now we see the three sector flow, three sector flow, what do we see in three sector flow? See there's government introduction. So what is happening? Again, this is they are. Okay, hold on. They are purchasing goods and services, they are demanding and because of their demand, they are getting income from them from firms. But there's government exchange also, households are paying taxes, and further government are paying taxes, government are making purchases from the firm. Now firms are also paying corporate taxes, and government are doing social transfers to household. So that is how government is being introduced here. Okay, so yeah, under the three sector model, national income is obtained by y is equal to c plus i plus g. Now there's another sector government is also making expenditures. So the total income flowing in the economy is consumption expenditure, investment by the firms and government expenditure. Now we are introducing rest of the world also. So this is external sector, trade, trade sector of the economy. And this is the domestic circular flow. So this much we also saw earlier also above here, this is domestic. So we are just raising the bar above domestic, what is the rest of the world doing, rest of the world is importing, okay, and we are further exporting. Okay, that is what is happening with the external sector. So in a four sector economy, in addition, in addition to household firms and government, a fourth sector, namely external sector is included. In real life, only four sector economy exists, there's no two sector or three sector in actual real economy. If we move away from the book and in the practical world, it's a four sector economy, we have our open economy. This model is composed of four sector household government firms and external sector. Okay, the external sector comprises exports and imports. Okay, this is illustrated in the flowchart. And in the four sector expenditure for the entire economy, include domestic expenditure, domestic expenditure is what c plus i plus g that our domestic economy, the three sectors of our domestic economy are spending consumption expenditure, investment expenditure, government, and net export is the external sector expenditure, that is what we are exporting them and getting money. So unka kharcha minus we are paying to them. So the net exports the net expenditure by the foreign sector or the external sector. So the entire equation, the total expenditure becomes c plus i plus g plus x minus. Okay, with that we have our summary, what was this chapter all about. And with that we have covered actually the first chapter and we have read all of these things we have read about all of these things in our previous videos. And these are the model questions if you need I can send this PDF of the book on the telegram link which is mentioned by the way in the description box in the description box. The first link is telegram group calling you can go to the telegram link find the link of find the PDF of this book and solve these questions if you want we can solve these questions together. Okay. Like for example, this is a very fun question. I told you who's the father of modern macroeconomics and who's you know, other name for macroeconomics kya hota hai. So I told you everything like every what is the other name of macro and then macroeconomics is the study of these are very easy questions you will get to know the economic system representing equal equal equality in distribution is what equality in distribution is a capitalism. How would that be equalism? So, you know, this is fun father of capitalism who's father of capitalism. These are these are fun fun questions which country following capitalism is so among these countries which is following capitalism India is not China is not you know, figure out amongst these. So this is this is important. Okay, this is fun. These are the fun questions guys. And with that, I think I'll end this video here. And from tomorrow onwards, we'll begin with national income chapter and we'll go to the meaning of national income and everything. Thank you so much for staying tuned so longer and I hope you're liking this series guys. And if yes, do share your feedback about what do you think about these videos? And I'll see you tomorrow with another one but feedback is very important like share and comment down below about how do you feel about these videos and do consider subscribing to the channel most of you watch the videos but don't subscribe guys don't do that. Okay, it takes a lot of hard work to put in those videos put out those videos, these videos for you out there. So you also show slight bit of love and I think that will be enough and take care keep practicing well, I'll see you tomorrow till then take care.