Circular Flow of Income  

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.

circular flow

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

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