Introduction Important Questions for class 12 economics Investment, Stock, Flows and Circular Flow of Income
1. Investment It is the process of capital formation by a firm or increase in the stock of existing capital stock.
2. Components of Investment
(i) Fixed investment In a specific time period (generally in an accounting year), the increase in the stock of fixed assets of the producers is termed as fixed investment.
(ii) Inventory investment During a specific time period, (generally an accounting year) the change in inventory stock (i.e. the sum of unsold goods, semi-finished goods and raw materials) is termed as inventory investment, it is also called as change in stock and calculated as closing stock – opening stock.
3. Types of Investment
(i) Gross investment: Gross investment of an economy constitutes that part of our final output that comprises of capital goods, i.e. expenditure on fixed assets or on inventory stock.
Gross Investment = Expenditure on the Purchase of Fixed Assets in an Accounting Year + Expenditure on the Inventory Stock in an Accounting Year.
(ii) Net investment: It is the increase in stock of capital during an accounting year. It is also termed as new capital formation.
Net Investment = Gross Investment – Depreciation
4. Concept of Depreciation: It is the loss of value of fixed assets in use on an account of normal wear and tear, normal rate of accidental damages and expected or foreseen obsolescence. Depreciation is also called consumption of fixed capital.
5. Depreciation Reserve Fund: It is a fund created by the producers to meet the upcoming depreciation losses in the process of production.
6. Inventory: It is termed as the stock of unsold finished goods, semi-finished goods (goods which are in the process of production) and raw materials which a firm carries from one year to the next year. *
7. Stock: These are defined as any quantity measured at a particular point of time, e.g. number of machines in a plant, amount in the bank account on a specific date, etc.
8. Flow: These are defined as any quantity measured per unit at a particular period of time. e.g. income or expenditure over a time period of one month or one year.
9. Circular Flow of Income: The circular flow means the unending flows of production of goods and services, income and expenditure in an economy. It shows the redistribution of income in a circular manner between production unit and households.
10. Phases of Circular Flow Income
(i) Production of goods and services.
(ii) Generation of income in terms of wages, rent, interest and profit.
(iii) Expenditure in terms of consumption and investment.
11. Types of Circular Flow of Income
(i) Real flow: The flow of factor services from households to business and flow of goods and services from business to households is known as real flow.
(ii) Money flow The flow of money across different sectors of the economy is temed as money flow. i.e. exchange of factor services by the household for factor payments from firms.
(iii) Injections: It means introduction of income into the flow when households and firms borrow the savings, they constitute injections.
(iv) Leakages: It refers to the withdrawal from the flow, when households and firms save part of their incomes, it constitutes leakage.
12. Different Sectors in Circular Flow of Income in an Open Economy
(i) Production sector (ii) Household sector
(iii) Government sector (iv) Rest of the world sector
Previous Years Examination Questions
1 Mark Question
1.Define stock variable. (Delhi 2012; All India 2011)
Ans . Stock variables are defined as any quantity measured at a particular point of time. e.g. number of machines in a plant, amount in the bank account on a specific date, etc.
2. Define flow variable. (All India 2012; Delhi 2011)
Ans. Flow variables are defined as any quantity measured per unit at a particular period of time, e.g. income or expenditure over a time period of one month or one year.
3. Define depreciation. (All India 2011)
Ans. It is the loss of value of fixed assets in use on an account of normal wear and tear, normal rate of accidental damages and expected or foreseen obsolescence. Depreciation is also called consumption of fixed capital.
3 Marks Question
4.Explain the circular flow of income. (Compartment 2014; Delhi 2009)
Circular flow of income refers to the unending flows of production of goods and services, income and expenditure in an economy. It shows the redistribution of income in a circular manner between production units (firms) and households. It can be better understood with this diagram
4 Marks Questions
5. Distinguish between stock and flow. Give two examples of each. (All India 2013)
6.Give reasons and categorise the following into stock and flow
(Delhi 2013)
(i) Capital (ii) Saving
(iii) Gross Domestic Product (iv) Wealth
Ans. (i) Capital : It is a man made means of production. It is a stock because it is measured at given point of time.
(ii) Saving: Give reasons and categorise the following into stock and flow
(iii) Gross Domestic Product: It is a flow as it is the market value of final goods and services produced within the domestic territory during a period of time.
(iv) Wealth : It is a stock as it is measured at a particular point of time.
7. Explain the circular flow of income. (Delhi 2013)
Ans. Circular Flow of Income: Circular flow of income refers to the unending flows of production of goods and services, income and expenditure in an economy. It shows the redistribution of income in a circular manner between production units (firms) and households. It can be better understood with this diagram
Phases of Circular Flow of Income: There are three different phases (generation, distribution and disposal) in circular flow of income, as shown in the given diagram
(i) Generation phase : In this phase, firms produce goods and services with the help of factor services.
(ii) Distribution phase This phase involves the flow of factor income (rent, wages, interest and profit) from firms to the households.
Disposal phase In this phase, the income received by factors of production, is spent on the goods and services produced by firms.
Income is first generated in production units, then distributed to households, and finally spent on goods and services produced by these units to make the circular flow complete its course.
8. Give reasons and categories the following into stock and flow
(i) Profits (ii) Capital
(iii) Savings (iv) Balance in bank account (All India 2011)
Ans. (i) Profits: These are flow variables as it is measured over a period of time.
(ii) Capital : It is a man made means of production. It is a stock because it is measured at given point of time.
(iii) Savings: Give reasons and categorise the following into stock and flow
(iv) Balance in bank account: This is a stock variable which is measure on a specific date, i.e. point of time.
9. Give reasons and categories the following in stock and flow
(i) Losses (ii) Capital
(iii) Production (iv) Wealth (Delhi 2011 c)
Ans. (i) Losses: These are those flows as it is measured over a period of time.
(ii) Capital : It is a man made means of production. It is a stock because it is measured at given point of time.
(iii) Production: It is a flow as it is measured over a period of time.
(iv) Wealth :It is a stock as it is measured at a particular point of time.
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