(i) Circular flow of income is a model of an economy showing connections between different sectors of an economy.
(ii) It shows flows of income, goods and services and factors of production between economic agents such as firms, households, government and nations.

(i) A Model is a simplified representation of real situation.
(ii) Economists use models to describe economic activities, their relationships and their behaviour.

(i) Capitalism is a system where the means of production are privately owned.
(ii) Market determines the economic activities (e.g.) The USA, Japan.

Economies can be classified into different types based on the Status of Development are
1. Developed
2. Underdeveloped
3. Undeveloped and
4. Developing economies

An Economy is refered to any system or area where economic activities are carried out.

There are only two sectors - household sector and firm sector.
(i) Household Sector
1. It supplies the factors of production and gets income from the firm sector
2. It buys goods and services with its entire income.
(ii) Firms:
1. It hires factors of production from the household sector.
2. It gets revenue by selling goods and services to the household sectors.
3. The production and sales are equal.
Y = C + I
Y is income
C is consumption
I is investment

S.No.	Capitalism	Globalism
1	Also called free economy or laissez faire or market economy where the role of the government is minimum	Also called extended capitalism. It connects nations together through international trade
2	Market determines economic activities within a nation	It aims at global development Manfred
3	Adam Smith is the father of the capitalism	D. Steger (2002) coined the term

(i) The means of production and properties are owned by private and public.
(ii) Public and Private Sectors co-exist private sectors are profit motivated and public sectors aims at maximum social welfare.
(iii) The national plans prepared by the central planning authority is accepted by all sectors.
(iv) Basic economic problems are solved through the price mechanism and state intervention.
(v) Though the private can own resources, produce and distribute goods and services, the overall control on the economic activities is with the government.

(i) Red tapism and bureaucracy since, approval of many officials is needed.
(ii) Absence of incentive and so productivity is less.
(iii) Limited freedom of choice in the consumption of goods and services.
(iv) The state takes all major decisions. There is concentration and misuse of power.

(i) Automatic working without any government intervention.
(ii) Efficient use of resources.
(iii) Incentives for hard work.
(iv) Production and productivity are high, so there is economic progress.
(v) Consumers sovereignty exist.
(vi) Increased saving and investment leads to higher capital formation.
(vii) Development of new technology.

S.No	Features	Capitalism	Socialism	Mixedism
1.	Ownership of Means of Production	Private Ownership	Public Ownership	Private Ownership and Public Ownership
2.	Economic Motive	Profit	Social Welfare	Social Welfare and Profit Motive
3.	Solution of Central Problems	Free Market System	Central Planning System	Central Planning System and Free Market System
4.	Government Role	Internal Regulation only	Complete Involvement	Limited Role
5.	Income Distribution	Unequal	Equal	Less unequal
6.	Nature of Enterprise	Private Enterprise	Government Enterprise	Both Private and State Enterprises
7.	Economic Freedom	Complete Freedom	Lack of Freedom	Limited Freedom
8	Major Problem	Inequally	Inefficiency	Inequality and Inefficiency

1. Capitalism and socialism are two extreme and opposite approaches.
2. In capitalism, there is total freedom but in socialism, there is no freedom at all.
3. In capitalism, there is private ownership of means of production but there is public ownership of means of production in socialism.
4. Profit is the driving force behind all economic activities in capitalism but it is social welfare under socialism.
5. Capitalism enjoys free market but in socialism there is central planning.
6. There is unequal income distribution in capitalism but there is equal income distribution in socialism.
7. The major problem in capitalism is inequality but it is inefficiency in socialism.

1. In an economy, the fundamental economic activities are production and consumption.
2. These are several other activities.
3. The ultimate aim is to achieve growth.
4. The exchange activity supports production and consumption.
5. These activities are influenced by economic and non economic activities.
6. The economic activities include transportation, banking, advertising, planning.
7. The non-economic activities are environment, education, health, entertainment.
8. The external activities are import, export, international relations, emigration, immigration, foreign investment, foreign exchange earnings.
9. All these activities influence the entire functioning of the economy.

National Income:
(i) Measurement of national income and its composition by sectors are the basic aspects of macro economic analysis.
(ii) It gives a long term understanding of the growth process of an economy.
Inflation:
(i) Estimating the general price level based on wholesale price, index, consumer price.
Business Cycle:
(i) Cyclical movements can be studied based on aggregate economic variables.
Poverty and Unemployment:
(i) Clear understanding about the magnitude of poverty and unemployment helps allocation of resources and adapting corrective measures.
Economic Growth:
(i) The growth and development of an economy and the factors determining them could be understood only through macro analysis.
Economic Policies:
(i) Macro Economics is used to frame economic policies.
(ii) Economic policies are used to solve the basic problems, to overcome the obstacles and to achieve growth.