• The?circular flow of income?is an?economic model?that illustrates?money flows?in an economy
  • There is a simple model which shows the?money flows?between?households?and?firms
  • There is a?more complex model which adds in other economic agents including the?government,?financial sector?and?foreign trade?(net exports)

A diagram showing the simplified Circular Flow of Income between households and firms

Diagram Analysis

• Households?own the?wealth?in the economy
  • These are the?factors of production
• Households supply?their factors of production to firms and?receive income?as a reward
  • They receive?rent?for land,?wages?for labour,?interest?for capital, and?profit?for enterprise
  • With this income, they purchase goods/services from firms
• Firms?purchase factors of production from households
• • They use these resources to?produce goods/services
  • They?sell the goods/services?to households and receive?sales revenue

• National income?is the value of the output of an economy over a period of time
  • It can be calculated using the?income approach?or?expenditure approach
  • Expenditure = income
• Income is a?flow?in the economy, whereas wealth is a?stock of assets?that can be used to?generate income