Circular Flow of National Income: The Circular Flow of National Income and expenditure refers to the process, whereby the national income and expenditure of 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.
- The business sector produce goods and services and sells them to the household sector.
- The household sector receives income by selling the services of these 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 the entire amount of money, which is paid by the business sector as factory payments, is paid back by the factory 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.
