The circular flow of income

Need to know

What you need to know

• Households supply factors of production to firms.
• Firms pay factor incomes (rent, wages, interest, profit) to households.
• Households use income for consumption expenditure on goods and services from firms.
• There is a 'real' flow of factors and goods, and a 'money' flow of incomes and expenditure.

Explanation

The circular flow of income

1. Households supply factors of production to firms.
2. Firms pay factor incomes (rent, wages, interest, profit) to households.
3. Households use income for consumption expenditure on goods and services from firms.
4. There is a 'real' flow of factors and goods, and a 'money' flow of incomes and expenditure.