Income (Y) – Wages, dividends & interest that go from businesses and financial institutions to households.These occur because money is spent to:Īll factors from the Circular Flow of Income – including example: Withdrawals represent money flows out of the economy i.e. Just as money is injected into the economy, money is withdrawn or leaked through various means as well. Public spending, export, and investments are the three factors that drive more money into an economy. This represents money flows into the economy i.e. In addition, there are factors that cause money to flow into the economy (injections). There are several factors that cause money to flow (leaks) out of the closed economy. The circular flow of income in an economy is, in practice, not that simple. Households purchase the goods and services from the companies, for which they pay the companies. Rent for land, wages for labor and interest or dividend for money. The households receive money in exchange for the means of production.
Hence, the circle is round.Companies use the means of production to produce goods and services. On the other hand, there is a flow of goods and services.
Means of production (or production factors) are: In its simplest form, the circular flow of income economic model takes into account only two factors: The model takes into account six factors that influence cash flows within an economy. Circular Flow of Income model is a macro-economic model that explains how money is distributed within an economy.
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