Circular_Flow_and_National_Income_Notes
Circular_Flow_and_National_Income_Notes
The Circular Flow of Income explains how money, goods, and services move between different sectors of the
economy. It shows the continuous movement of production, income, and expenditure between households
and firms, and also includes government and foreign sectors in an open economy.
Households provide factors of production (land, labor, capital, entrepreneurship) to firms. Firms pay
households wages, rent, interest, and profits. Households then buy goods and services from firms.
Four-Sector Model
This model includes households, firms, government, and the foreign sector. It introduces taxes, government
spending, exports, and imports into the flow of money. National Income Identity: Y = C + I + G + (X - M).
National Income
National Income measures the total value of goods and services produced in a country during a given period,
2. Income Method: Sum of all incomes - wages, rent, interest, and profits.
Important Concepts
Ignores non-market activities, does not reflect income distribution, ignores environmental impact, and can be
Notes on Circular Flow of Income and National Income
distorted by inflation.
Summary
The Circular Flow of Income shows sectoral interdependence. National Income Accounting measures the