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Circular Flow Of Income Model, Households supply their factors of…
Circular Flow Of Income Model
The circular flow of income model is a foundational economic concept that illustrates how money, resources, and goods continuously move between different sectors of an economy
In its simplest form, the model features two main actors representing a closed, private economy:
Households: Own the factors of production (land, labor, capital, and entrepreneurship). They provide these to firms in exchange for income (wages, rent, interest, profit) and spend that income on goods and services.
Firms: Use the factors of production supplied by households to create goods and services, selling them back to households in return for consumer spending.
National Income
National Income is the total value of the newo utput of an economy over a period of time.
The output is produced by the physical and human captial in the economy
Income is a flow in the economy whereas wealth is the stock of assets that can be used to generate income.
Circular Flow In A Closed Economy
The Open Circular Flow of Income Model
Households and firms have been explained in the closed circular flow of income model above
Government: The government influences the size of the circular flow through its taxation (T) and spending policies
Financial sector: The financial sector influences the size of the circular flow by providing funds for Investment (I) and a safe place for households and firms to store their savings
Foreign sector: Globalisation means that the level of exports (X) and imports (M) significantly affects the size of the circular flow of income in most countries
Households supply their factors of production to firms and receive income as a reward
They receive rent for land, wages for labour, interest for capital, and profit for enterprise
With this income, they purchase goods and services from firms
Firms purchase factors of production from households
They use these resources to produce goods and services
They sell the goods and services to households and receive sales revenue
The Two-Sector Model
Households own the wealth in the economy
