Circular Flow of Income Diagram

By on March 31, 2012 in economics

The Circular flow of income diagram models what happens in a very basic economy.
Circular Flow of Income

 

In the very.basic model, we have  two principal components of the economy:

  1. Firms. Companies who pay wages to workers and produce output.
  2. Households. Individuals who consume goods and receive wages from firms.

 

This circular flow of income also shows the three different ways that National Income is calculated.

  1. National Output. Output  produced by firms.
  2. National Income. The total income received by people in the economy. For example, firms have to pay workers to produce the output. Therefore income flows from firms to households.
  3. National Expenditure. Total amount spent on goods and services. For example, with wages from work, households can then buy goods produced by firms. Therefore, the spending goes back to firms.

This represents a simple economic model; it is a closed economy without any government intervention.

In the real world it is more complicated. We also add two more components:

  1. Government. The government taxes firms and consumers, and then spends money, e.g. health care and education.
  2. Foreign sector. We sell exports abroad and buy imports. Therefore, there is a flow of money between one country and the rest of the world.

 

 

Withdrawals (W) into Circular Flow of Income

Withdrawals are items that take money out of the circular flow. This includes:

  • Savings (S) (money not used to finance consumption, e.g. saved in a bank)
  • Imports (M) (money sent abroad to buy foreign goods)
  • Taxes (T) (money collected by government, e.g. income tax and VAT)

Injections (J) into Circular Flow of Income

Spending that puts money into the circular flow of income.

  • Investment (I). Money invested by firms into purchasing capital stock.
  • Exports (X). Money coming from abroad to buy domestically produced goods.
  • Government spending (G). Government welfare benefits, spending on infrastructure.

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42 Responses to Circular Flow of Income Diagram

  1. Manisha March 14, 2013 at 8:39 am #

    I learnt a lot from this site. Thanks for such a clear and concise explanation.

    Reply
  2. chameli akter March 10, 2013 at 3:42 pm #

    I would like to know …….. circular flow of national income in three sector of economy . Please u submit this topics

    Reply
  3. Ahmad Milad Ghawsi December 2, 2012 at 7:08 am #

    thanks i learned alot but more is needed.

    Reply
  4. Imran Ahmed May 28, 2012 at 1:44 pm #

    thanks!

    Reply
  5. chiedza February 18, 2012 at 4:05 pm #

    thanks for the diagram it really helps…..:)

    Reply
  6. oscar September 29, 2011 at 11:14 am #

    more diagram please.well, thanks.

    Reply
  7. thax 4 d dragram September 22, 2011 at 9:21 am #

    i need more of d dragram

    Reply
  8. Dheeraj choudhary September 17, 2011 at 6:40 pm #

    thanks for the diagram but i need more

    Reply
  9. mayuri September 9, 2011 at 6:22 pm #

    thanks for the diagram…………………………..

    Reply
  10. IME August 3, 2011 at 1:15 pm #

    it ok but,i need more info on it. Tanks

    Reply
  11. Ayesha butt April 19, 2011 at 8:16 pm #

    i learned many things form this site about economics.

    Reply
  12. ismaila April 18, 2011 at 11:51 am #

    thanks alot

    Reply
  13. Obonya April 6, 2011 at 11:25 am #

    Thanx for the explanation on this matter, but I also need an explanation with a diagram, but when I liked it to the wikepedia diagram it helped a lot

    Reply
  14. lalana March 30, 2011 at 12:46 pm #

    how to measure national income and double counting error

    Reply
  15. mambou jofrel March 23, 2011 at 5:01 pm #

    thanks for the diagram it realy helped me

    Reply
  16. mambou jofrel March 23, 2011 at 5:00 pm #

    thanks a lot for the diagram and not to forget about the notes .it realy helped me

    Reply
  17. agness March 17, 2011 at 1:05 pm #

    am currently studying economics

    Reply
  18. agness March 17, 2011 at 1:04 pm #

    the diagram has helped me to answer the assignment ,thanks

    Reply
  19. clause March 16, 2011 at 12:43 am #

    its really Awsome lols .. nahr i dont even know what this is about

    Reply
    • maegan June 20, 2012 at 7:18 am #

      thank you for giving this diagram, it really help me answered my assignment in economics

  20. flq March 12, 2011 at 9:40 pm #

    salam! its good but not enough this is two secter circle flow of national income.so i think you should also gave 3 or 4 sector flow of n.i

    Reply
  21. muddathir March 8, 2011 at 7:17 pm #

    salam! its good, but the explanation needs to be on the diagram so as to enable good and proper understanding.

    Reply
  22. esther March 5, 2011 at 4:27 pm #

    ive learned alot

    Reply
  23. Vin@y November 6, 2010 at 5:43 pm #

    hi! here some incompleteness in topic. and diagramme is not easy to understand.

    Reply
  24. vinaya October 11, 2010 at 3:50 pm #

    gud! but more information & articles can make it more interesting & usefull .

    Reply
  25. allen tlou September 17, 2010 at 8:44 am #

    thanks for the comments in the research about the income and expenditure.

    Reply
  26. marj bucio July 5, 2010 at 2:52 am #

    thank you so much!!!! can i ask more details especially the explanation of import and export.

    Reply
  27. abrar shah June 15, 2010 at 7:33 am #

    i learned alot from this diagram this is enough for understanding and its a great effort to clear the concept of economics thanks

    Reply
  28. khalilrahman June 9, 2010 at 2:05 pm #

    i really want to study

    Reply
  29. Hadija March 6, 2010 at 9:05 am #

    Your work is real god

    Reply
  30. Bilal mengal February 26, 2010 at 10:23 am #

    thank you very much for your struggle , to be honest i learned lots of things regarding economics ,
    well i also have a blog of introduction to Economics
    but this web blog is in Pashto language i will translate some of yours subjects as well..
    thanks

    Reply
  31. joy November 27, 2009 at 3:15 am #

    thanks….

    Reply
  32. WAQAS November 24, 2009 at 6:11 am #

    THANK U FOR GIVING ME THE CONCEPT

    Reply
  33. hashmi October 15, 2009 at 8:42 am #

    this is no enough the role of govt. is not mention in the diagram

    Reply
  34. Adediji oluwaseun October 6, 2009 at 8:02 pm #

    nice explanation,thanks a whole lot…….it was easy getting the neccessay details i needed……keep it up……..Can you please prescribe an economics textbook i can use for my foundation class?……you can email it to me…thanks again

    Reply
  35. brian September 21, 2009 at 1:33 pm #

    thanks alot i got all i wanted

    Reply
  36. gaurav July 5, 2009 at 8:25 am #

    gud but not enough,u must gve sum xtra information

    Reply
  37. pashtoon zirak May 7, 2009 at 7:04 am #

    Dear sallam !
    it is good i get alot of information from this web site about economic and i solved my 70% problem from the help of this site

    thanks alot

    Reply
  38. pia March 22, 2009 at 12:10 am #

    its good information.
    but..
    you need a diagram..

    Reply
  39. mary ann February 19, 2009 at 4:44 am #

    thank you so much^^ i learned a lot from this website,but i need to know about the 4 chart of economics flow of economics flow chart…

    Reply
  40. hina February 16, 2009 at 6:01 pm #

    i learnt but i need more details thanks anyways

    Reply
  41. chuck February 13, 2009 at 1:56 pm #

    thank you…

    i learned a lot…

    thanks very much…

    Reply

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