Lecture notes
The Circular Flow of Income
- Module
- Business And Management
- Institution
- The University Of Kent (UKC)
Detailed notes on The Circular Flow of Income
[Show more]
Seller
Follow
Content preview
The Circular Flow of IncomeIn the diagram, the economy is divided into two major groups: firms and households. Each
group has two roles. Firms are producers of goods and services; they are also the employers
of labour and other factors of production. Households (individuals) are the consumers of
goods and services; they are also the suppliers of labour and various other factors of
production.
Note that money is a stock concept, and income as well as expenditure are flow concepts.
The relationship between money and income depends on how rapidly the money circulates
(its velocity of circulation). For instance, if there is £500 billion of money in the economy
and each £1 on average is paid out as income three times each year. Then the national annual
income will be 1.5 trillion.
The inner flow, withdrawals (leakages) and injections
The inner flow
Firms pay money to households in the form of wages and salaries, dividends on shares,
interest, and rent. These payments are in return for the services of the factors of production
that are supplied by households (e.g. labour, land, capital). Thus on the left-hand side of the
diagram money flows directly from firms to households as factor payments.
Households pay money to domestic firms when they consume domestically produced goods
and services. This is shown on the right-hand side of the inner flow. There is thus a circular
flow of payments from firms to households to firms and so on.
If households spend all their incomes on buying domestic goods and services, and if firms
pay out all this income they receive as factor payments to domestic households, and if the
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller nkgnd. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £2.99. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
85443 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now