Consider the hypothetical example of Dominion Island that has firms producing only two goods, gold and...

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 neighbouring islands through its banks. Assuming that all other required institutions in an economy are prevalent in this island, discuss the circular flow of income and spending in Dominion Island. No diagram is required.

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Answer:
Circular flow of income and spending in Dominion Island is as mentioned below:

As all purchase of goods other than cotton and gold is being done only Via banks, the bak can issue virtual credits or paper form of credit for the amount of cotton and Gold that a person can submit to the bank.
That virtusal credit can be used by everyone in the island to purchase any other goods.
Even from the bank we can submit the virtual credit that we get by selling cotton and Gold to the bank purchase other commodity which bank purchase from outside by giving them gold and cotton, which can be sold to all the persons in the island as the cost of Virtual cedit or paper credit provided by the bank.
So flow of income and comodity is happening via Virtual cerdit which is handy and availablw with everyone.
Even employer can pay their employees or for their services in the form of Virtual cerdit which they can use to purchase food and other necessity.
Referncing is always done between gold and this virtual credit to maintain balalnce in the economy, and their fluctuations can bring inflation in the island economy.

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Rahul Sunny answered 1 year ago

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