Q1.

Explain circular flow of economic activities

Ans. Circular Flow of Economic Activity
The circular flow of economic activity is a model showing the basic economic relationships within a
market economy. It illustrates the balance between injections and leakages in our economy. Half of the
model includes injections, and half of the model includes leakages. The circular flow model shows where
money goes and what it's exchanged for. The model includes households, businesses and governments.
We also have the banking system that facilitates the exchange of money and, as we'll see in a minute,
helps to productively turn savings into investment in order to grow the economy. In the circular flow of
the economy, money is used to purchase goods and services. Goods and services flow through the
economy in one direction while money flows in the opposite direction.

The circular flow model shows the balance of economic injections and leakages

The factors of production include land, labor, capital and entrepreneurship. The prices that correspond
to these factors of production are rent, wages and profit. People in households buy goods and services
from businesses in an attempt to satisfy their unlimited needs and wants. Households also sell their
labor, land, and capital in exchange for income that they use to buy goods and services that firms
produce. Businesses sell goods and services to households, earning revenue and generating profits.
Businesses also pay wages, interest and profits to households in return for the use of their factors of
production. Governments levy taxes on households and businesses in order to provide certain benefits
to everyone.

Q2. Explain between economic growth and economic

development?
Ans. Economic Growth: -
Economic growth can be referred to as the increase that is witnessed in the monetary value of all the
goods and services produced in the economy during a time period. It is a type of quantitative
measure that reflects the potential increase in the number of business transactions taking place in
the economy.

Economic growth can be measured in terms of the increase in the aggregate market value of
additional goods and services produced by using economic concepts such as GDP and GNP.

Economic Development: -
Economic growth is a narrow concept when compared to economic development.
Economic development refers to the process by which the overall health, well-being, and academic
level of the general population of a nation improves. It also refers to the improved production volume
due to the advancements of technology.

It is the qualitative improvement in the life of the citizens of a country and is most appropriately
determined by the Human Development Index (HDI). The overall development of a country is based
on many parameters such as the creation of job opportunities, technological advancements,
standard of living, living conditions, per capita income, quality of life, improvement in self-esteem
needs, GDP, industrial and infrastructural development, etc.

Economic Growth Economic Development

Definition

It refers to the increase in the monetary It refers to the overall development of the quality of
growth of a nation in a particular period. life in a nation, which includes economic growth.

 Span of Concept 

It is a narrower concept than that of It is a broader concept than that of economic growth.
economic development.

                                                                                Scope

It is a uni-dimensional approach that deals It is a multi-dimensional approach that looks into the
with the economic growth of a nation. income and as well as the quality of life of a nation.

                                                                                Term

Short-term process Long-term process

                                                                        Measurement

Quantitative Both quantitative and qualitative

                                                                        Applicable to

Developed economies Developing economies

                                                                 Government Support

It is an automatic process that may or may It requires intervention from the government as all
not require intervention from the the developmental policies are formed by the
government government
                                                              Kind of changes expected

Quantitative changes Quantitative as well as qualitative changes

                                                                         Examples

GDP, GNP HDI, per capita Income, industrial development

Q2.2. Explain The Business Cycle?

Ans. The term “business cycle” (or economic cycle or boom-bust cycle) refers to
economy-wide fluctuations in production, trade, and general economic activity. From a
conceptual perspective, the business cycle is the upward and downward movements of
levels of GDP (gross domestic product) and refers to the period of expansions and
contractions in the level of economic activities (business fluctuations) around a long-
term growth trend.

Figure 1. Business Cycles: The phases of a business cycle follow a wave-like pattern over time with regard to
GDP, with expansion leading to a peak and then followed by contraction.

Business Cycle Phases

Business cycles are identified as having four distinct phases: expansion, peak,
contraction, and trough.

An expansion is characterized by increasing employment, economic growth, and

upward pressure on prices. A peak is the highest point of the business cycle, when the
economy is producing at maximum allowable output, employment is at or above full
employment, and inflationary pressures on prices are evident. Following a peak, the
economy typically enters into a correction which is characterized by
a contraction where growth slows, employment declines (unemployment increases),
and pricing pressures subside.  The slowing ceases at the trough and at this point the
economy has hit a bottom from which the next phase of expansion and contraction will
emerge.

Business Cycle Fluctuations

Business cycle fluctuations occur around a long-term growth trend and are usually
measured in terms of the growth rate of real gross domestic product.

In the United States, it is generally accepted that the National Bureau of Economic
Research (NBER) is the final arbiter of the dates of the peaks and troughs of the
business cycle. An expansion is the period from a trough to a peak, and
a recession as the period from a peak to a trough. The NBER identifies a recession as
“a significant decline in economic activity spread across the economy, lasting more than
a few months, normally visible in real GDP, real income, employment, industrial
production. ” This is significantly different from the commonly cited definition of a
recession being signaled by two consecutive quarters of decline in real GDP.  If the
economy does not begin to expand again then the economy may be considered to be in
a state of depression.