Circular Flow of Income

Posted in Finance, Accounting and Economics Terms, Total Reads: 1059

Definition: Circular Flow of Income

Circular Flow of Income is the flow of money made as payments in exchange for products and services between the customers and the manufacturers. The flow of goods and services between various sectors in the economy, balanced by the flow of payments made in exchange for goods and services. 

Circular flow of income can be explained with two sector model. The two sectors are households and firms. Households receive factor incomes from the firms which they spend on goods and services produced by the firms.

*Assumption used here is that there is no saving or no leakages i.e. all the money received by the households will be spent on consumption.

However, real money flow is not that simple as in actual economy there are more than two sectors and assumption of no savings does not stand true.

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