What is a Circular Flow of Income?
” While this approach to understanding general money movement can help to provide an overview of the economy, many analysts consider the circular flow of income model to be only one of several tools necessary to fully grasp the state of income flow within a given set of perimeters. . Developing a circular flow of income for a given situation requires making a few basic assumptions. First, it is assumed that the economy is composed of two basic components, sometimes defined as households and firms. In some models, these are referred to as the residential and business sectors. Next, the model will not address the existence of an international component, a government component, or a sector that engages in financial services.
The circular flow of income is a basic accounting model that helps to demonstrate the inflow of revenue and the relationship of that flow to the general economy. In order to create a model for a circular flow of income, it is necessary to make a few basic assumptions that are considered likely to apply. While this approach to understanding general money movement can help to provide an overview of the economy, many analysts consider the circular flow of income model to be only one of several tools necessary to fully grasp the state of income flow within a given set of perimeters. Developing a circular flow of income for a given situation requires making a few basic assumptions. First, it is assumed that the economy is composed of two basic components, sometimes defined as households and firms. In some models, these are referred to as the residential and business sectors. Next, the model will not address the existence of an international component, a government component, or a sector tha
