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Circular flow of income and output

Definition

The circular flow of income and output is a model that shows the flow of money, goods, and services between households and businesses in an economy. It demonstrates how households receive income from businesses through factors of production (such as labor) and spend that income on goods and services produced by businesses.

Analogy

Think of the circular flow of income and output like a game of catch between households and businesses. Businesses throw money to households in exchange for their work or resources, while households throw money back at businesses to purchase goods and services.

Related terms

Households: Refers to individuals or groups who consume goods and services. They are one of the key players in the circular flow model.

Businesses: Represents producers who supply goods and services to households. They are another key player in the circular flow model.

Factors of Production: These are resources used by businesses to produce goods and services, such as labor, capital (machinery), land, and entrepreneurship.