The Circular Flow of income represents a simple static model of the basic flows of money in an economy.
In a closed economy with no government, there are 2 basic agents – households and firms.
- Firms produce OUTPUT
- and then pay INCOME to households.
- Households then use this income to buy goods EXPENDITURE.
Thus the circular flow of incomes shows 3 different methods of calculating GDP, income, output and expenditure.
- We can also add taxes and government spending and imports and exports to other countries
For more explanation see: Circular Flow of Income