Circular flow of income

What does it illustrate

A simplified model of the economy

Illustrates the interactions between

Households- the owners of the factors of production (land, labour, capital, enterprise)

Firms- produce output for households (goods and services)

Circular flow of income

Shows that the value of the economy can be determined in three ways:

Income- the sum of all money paid to households (rent, wages, interest, profit)

Output- the value of all the goods and services produces

Expenditure- the sum of all spending on g/s by households

Injections

Money leaving the circular flow, reducing income (Y)

Savings (S)

Taxation (T)

Imports (M)

Leakages

Money entering the circular flow of income (Y)

Investment (I)

Government spending (G)

Exports (X)