Circular Flow of Income Diagram

March 31st, 2008 | economics -

Readers Question: How does the Wheel of Income and the National Income Accounting relate to each other and to the Government and Foreign Sector components? How does all this fit on a Wheel of Income?

Circular Flow of Income

To be honest I have never heard of the ‘wheel of income’ before. I assume it means the ‘circular flow of income’ which is a much more common economic term.

The circular flow of income refers to a simple economic model which shows the flow of income in an economy. The circular flow of income also show the 3 different methods that National Income is calculated.

1. National Output. Output is produce by firms.

2. National Income. Firms have to pay workers to produce the output. Therefore income flows from firms to households.

3. National Expenditure. With wages from work, households can they 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 interverntion.

National Income Accounting. There are 3 ways to calculate National Income (GDP)

National Output
National Income
National Expenditure

These 3 methods should give the same result (allowing for accounting discrepencies)

In the real world it is more complicated

4. The government tax firms and consumers and then spends money

5. 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.

I will try get a diagram soon, in the meantime you can see this circular flow diagram at Wikipedia.

13 comments ↓

#1 chuck on 02.13.09 at 1:56 pm

thank you…

i learned a lot…

thanks very much…

#2 hina on 02.16.09 at 6:01 pm

i learnt but i need more details thanks anyways

#3 mary ann on 02.19.09 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…

#4 pia on 03.22.09 at 12:10 am

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

#5 pashtoon zirak on 05.07.09 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

#6 gaurav on 07.05.09 at 8:25 am

gud but not enough,u must gve sum xtra information

#7 brian on 09.21.09 at 1:33 pm

thanks alot i got all i wanted

#8 Adediji oluwaseun on 10.06.09 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

#9 hashmi on 10.15.09 at 8:42 am

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

#10 WAQAS on 11.24.09 at 6:11 am

THANK U FOR GIVING ME THE CONCEPT

#11 joy on 11.27.09 at 3:15 am

thanks….

#12 Bilal mengal on 02.26.10 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

#13 Hadija on 03.06.10 at 9:05 am