DURBAN FIRMS PRODUCING ONLY TWO GOODS, DIAMOND AND GOLD. THE PROCEED OF WHICH IT USES TO...

DURBAN FIRMS PRODUCING ONLY TWO GOODS, DIAMOND AND GOLD. THE PROCEED OF WHICH IT USES TO PURCHASE GOODS AND SERVICES FROM NEIGHBORING TOWNS THROUGH BANKS. DISCUSS THE CIRCULAR FLOW OF INCOME AND SPENDING IN DURBAN.

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Answer:
As all other institutions in an economy are prevalent in the island, circular flow of income and spending in Durban town 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 Diamond 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 Diamond 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 available 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.
Referencing is always done between gold and Diamond and this virtual credit to maintain balalnce in the economy, and their fluctuations can bring inflation in the island economy.
Value produced by the town can be counted in terms of amount of Gold and Diamond which is exported to neighboring town compare to the import value. Town will be in trade surplus if export is more than the import which is there.

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Rahul Sunny answered 1 year ago

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