Page 3 - E-NOTE 2-converted

CIRCULAR FLOW OF INCOME (2 SECTOR ECONOMY)

I) HOUSEHOLDS TO FIRMS
- CONTRIBUTE FACTORS (LABOR, LAND, CAPITAL AND ENTREPRENEURSHIP)
TO FIRMS
II) FIRMS TO HOUSEHOLDS

-FACTORS ARE COMBINED (INPUTS) TO PRODUCE OUTPUT
III) FIRMS TO HOUSEHOLDS-FIRMS PAY PAYMENTS FOR THE FACTOR; WAGES
AND RENT
IV) HOUSEHOLDS TO FIRM- MAKE A PAYMENT FOR THE GOODS AND
SERVICES

PROBLEMS IN MEASURING NI
• DOUBLE COUNTING
• UNPAID ACTIVITIES
• LACK OF DATA
• ALLOWANCE FOR DEPRECIATION

USES OF NI DATA

• MEASURE ECONOMIC GROWTH
• INDICATE GENERAL ‘STANDARD OF LIVING’
• DISTRIBUTION OF INCOME IN ECONOMY
• ASSIST IN GOVERNMENT PLANNING