Circular Flow of Income

Statement

The circular flow of income is the flow of money, goods and services between economic agents in an economy.

Notes

The model tracks two flows running in opposite directions: a real flow of factor services and of goods and services, and a money flow of factor income and of expenditure that pays for them. Expenditure creates income: when households spend, firms earn revenue, which firms return to households as payment for factors of production. The simplest version is the two-sector model; adding the government and the foreign sector gives the four-sector model with its injections and leakages.