Question

consider

Consider the hypothetical example of dominion Island that has firms producing only two goods, gold and cotton, the proceeds of which it uses to purchase other goods and services from neighboring islands through its banks. Assuming that all other institutions in an economy are prevalent in this island, discuss the circular flow of income and spending in dominion Island

Answer 1

Circular flow of income and spending in Dominion island is done as explained below:

--> Since all purchase the goods other than that of the cotton and gold that is being done only via banks, the bank can issue virtual credits or paper form of credit or the amount of the cotton and gold that a person can submit to the bank.

--> And also that particular virtual credit can be used by each and everyone in the island to buy any other products.

--> Even from the bank we can submit the virtual credit that we get by selling cotton and Gold to the bank purchaseother products which bank buys from the outside by giving them gold and cotton, which can be sold to all the persons in the island as the cost of the virtual credit or paper credit that are provided by the bank.

--> So the flow of income and the commodity is happening through virtual credit which is handy and made available with the everyone.

--> Even employer can pay their employees or for their services in the form of virtual credit which they can use to purchase food and other necessity.

--> And referencing is also done between the gold and this virtual credit to maintain balance in the economy and their functions can bring inflation in the island economy.