OMTEX CLASSES: Circular Flow of National Income

Circular Flow of National Income

Circular Flow of National Income
         The Circular Flow of National Income and expenditure refers to the process, whereby the national income and expenditure of an economy flow in a circular manner continuously through time.
       
  Circular flow in a simple economy :

We begin with a simple hypothetical economy, where there are only two sectors, the household and business.
         •        Households are the owners of factors of production and consumers of goods and services.
         •        Business sector produce goods and services and sell them to the household sector.
         •        The household sector receives income by selling the services of theses factors to the business sector.
         •        The business sector consists of producers who produce goods and services and sell them to the household sector of consumers.
         •        Thus, the household sector buys the goods and services from the business sector.
         •        Thus, one man's income is another man's expenditure.

It must be noted that entire amount of money, which is paid by business sector as factor payments, is paid back by the factor owners to the business sector. So, here is a circular and continuous flow of money income. In the circular flow of income, production generates factor income, which is converted into expenditure. This flow of income continues as production is a continuous activity due to never ending human wants. It makes the flow of income circular.