Briefly explain the different phases of circular flow of income. In an economy, if the Real Gross Domestic Product (GDP) is Rs. 300 crore and Price Index (with base = 100) is 110, calculate the Nominal Gross Domestic Product.

Question

Accepted Answer

The circular flow of income has three phases:

1. **Generation Phase** — Firms produce goods and services using factor services (land, labour, capital, enterprise) supplied by households. This production process generates income in the economy.

2. **Distribution Phase** — The income generated is distributed among factors of production in the form of rent, wages, interest and profit. This flow occurs from firms to households.

3. **Disposition Phase** — Households spend their factor income on goods and services produced by firms. This consumption expenditure flows from households back to firms, completing the cycle.

**Calculation:**
Nominal GDP = Real GDP × (Price Index / 100)
Nominal GDP = 300 × (110 / 100) = Rs. 330 crore