2.4.1 National Income & The Circular Flow

The circular flow of income is a model of the economy showing the movement of goods and services between households and firms, and their corresponding payments.

A. The Circular Flow Model

• Households provide factors of production (Land, Labour, Capital, Enterprise) to firms.

• Firms pay households factor incomes (Rent, Wages, Interest, Profit).

• Households use this income to buy goods and services from firms (Consumer Expenditure).

B. Income vs. Wealth

• Income: A flow concept. It is the money received per period of time (e.g., £30,000 per year salary).

• Wealth: A stock concept. It is the value of assets owned at a specific point in time (e.g., savings in a bank, ownership of a house).

  • Exam Tip: High wealth can lead to high future income (e.g., rent from a property portfolio).