Circular flow of dollars
Definition
The circular flow of dollars refers to the continuous movement of money within an economy, as it flows from households to firms for goods and services, and then back again as income in the form of wages, profits, and rent.
Analogy
Imagine a water cycle where water evaporates from rivers and oceans, forms clouds, falls as rain on land, then flows back into rivers and oceans. Similarly, money circulates in an economy by being spent on goods and services, received as income by individuals and businesses, and then spent again.
Related terms
Income approach: This is one method used to measure a country's GDP by adding up all the incomes earned by households and firms.
Consumption expenditure: Refers to the total amount spent on goods and services by households.
Investment expenditure: Represents the spending done by businesses on capital goods like machinery or buildings.
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