CASE STUDY: Under circular flow of income in two sector economy, households are the owners of factors of production, they provide factor services to the firms to which firms provide factor payments in exchange of their factor services. Factor payments flow from firms to households. Households purchases goods and services from firms for which they make payments to them. So, consumption expenditure flows from households to the firms. There are 2 types of flows involved i.e. Real flow and Money flow. Real flow refers to the flow of goods and services across different sectors of the economy. For example: labour, capital, enterprise, land flowing from household to firms. Whereas, money flow refers to flow of factor payments and payments for goods and services between household and firms. It refers to the flow of money across different sectors of the economy. It is called money flow because it is through money that various transactions take place. For example: rent, wages, interest, profits etc. 

Which of the following is incorrect conclusion with respect to circular flow that is mentioned in the above paragraph?

Payments for imports = Receipts from exports

The correct answer is option 3: Payments for imports = Receipts from exports

In a circular flow model, payments for imports and receipts from exports are usually not equal. A country may run a trade deficit (imports > exports) or a trade surplus (exports > imports). Therefore, this statement is incorrect.

The other statements are correct:

Total Production = Total Consumption: In a closed economy at equilibrium, the total value of goods and services produced (output) must equal the total value of goods and services consumed.

Factor Payments = Factor Income: Factor payments (wages, rent, interest, and profits) are the income earned by households for providing factors of production to firms. Therefore, they are equal to factor income.

Real flow = Money flow: The circular flow of income involves both the flow of goods and services (real flow) and the flow of money (money flow). These two flows are interconnected and move in opposite directions.