Consider the following statements about the circular flow of income in the simple economy described in NCERT:
(A) Measuring the aggregate value of final goods and services produced by all the firms gives the product method.
(B) The two arrows at the bottom of the circular flow diagram represent the factors of production market.
(C) Measuring the sum total of all factor payments gives the expenditure method.
(D) If households together spend more, their aggregate income eventually rises by the same amount.
(E) Introducing savings into the model changes the result that the three methods give the same estimate.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (D) only
The circular flow diagram and the three ways of measuring it.
(A) Measuring the aggregate value of final goods and services produced by all the firms gives the product method. — Correct. Measuring final goods produced by all firms, at B, is the product method.
(B) The two arrows at the bottom of the circular flow diagram represent the factors of production market. — Correct. The two bottom arrows show the factors of production market.
(C) Measuring the sum total of all factor payments gives the expenditure method. — Incorrect. The sum of factor payments, at C, is the income method.
(D) If households together spend more, their aggregate income eventually rises by the same amount. — Correct. Extra spending makes firms produce more and pay more, so income rises by the same amount.
(E) Introducing savings into the model changes the result that the three methods give the same estimate. — Incorrect. With savings added, the three methods still give the same estimate.
NCERT (2026-27): “2.2 Circular Flow of Income and Methods of Calculating National Income … In short, the two arrows on the top represent the goods and services market – the arrow above represents the flow of payments for the goods and services, the arrow below represents the flow of goods and services. The two arrows at the bottom of the diagram similarly represent the factors of production market. The lower most arrow going from the households to the firms symbolises the services that the households are rendering to the firms. Using these services the firms are manufacturing the output. The arrow above this, going from the firms to the households, represents the payments made by the firms to the households for the services provided by the latter. …” “2.2 Circular Flow of Income and Methods of Calculating National Income … If we measure the flow at B by measuring the aggregate value of final goods and services produced by all the firms, it will be called product method. At C, measuring the sum total of all factor payments will be called income method. …” “2.2 Circular Flow of Income and Methods of Calculating National Income … In other words, the households can decide to spend more – spend beyond their means. And in the end their income will rise exactly by the amount which is necessary to carry out the extra spending. …” “2.2 Circular Flow of Income and Methods of Calculating National Income … If we change our simple model described above and introduce savings, will it change the principal conclusion that the aggregate estimate of the income of the economy will remain the same whether we decide to calculate it at A, B or C? It turns out that this conclusion does not change in a fundamental way. …” |