What is the Circular Flow of Income Model?

What is the Circular Flow of Income Model?

simple circular flowThe Circular Flow of Income Model shows the key relationships of income, expenditure and production in the economy.

Expenditure, income and goods and services move through the sectors of the economy because of economic activity.

Because of this is hard to understand, the circular flow model makes these relationships easier to see.

The model in its simplest form, the two sector , shows flows through the household and business sectors.


Income leaks from the circular flow. These allow for saving, paying taxes and buying goods and services from other countries.

These leakages then move through the other sectors, government, financial and overseas.


Injections are in the form of government spending, lending and overseas purchase of exports flowing back into the economy.

Uses of the Circular Flow of Income Relationships

Economists calculate income, expenditure and production in the economy from understanding the circular flow of income.

circular flow of income

To learn more about this, as a starting point, take this Introductory Macroeconomics Tutorial Course Aggregate Demand and Supply Tutorial Course

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