Question

“Disposition Phase of circular flow of Income involves flow of factor Income, which comprises of rent, wages, interest, and profits from firms to households.” Defend or refute the statement, giving valid reasons in support of your answer.

Hint:

The circular flow of income connects production, income distribution, and expenditure, ensuring a balanced economic system.

Answer 1

This statement is correct. The disposition phase in the circular flow of income represents the distribution of factor incomes: Firms pay rent for land, wages for labor, interest for capital, and profits to entrepreneurs. Households receive these factor incomes and use them for consumption, savings, or paying taxes. This phase completes the cycle of income generation and expenditure, ensuring that income earned in production is re-circulated in the economy. Hence, the statement accurately describes the flow of factor income in the economy.