Circular Flow Of Income

What is the 'Circular Flow Of Income'

The circular flow of income is a neoclassical economic model depicting how money flows through the economy. In the most simple version, the economy is modeled as consisting only of households and firms. Money flows to workers in the form of wages, and money flows back to firms in exchange for products. This simplistic model suggests the old economic adage, "Supply creates its own demand."

BREAKING DOWN 'Circular Flow Of Income'

The circular flow of income model illustrates the interdependencies of different factors in the economy. However, actual money flows through the economy are far more complicated. Economists have expanded on the ideas of the circular flow of income model to better depict the complexity of modern economies.

RELATED TERMS
  1. Bond Circular

    A standardized legal document that contains an abbreviated version ...
  2. Circular Merger

    A transaction to combine companies that operate within the same ...
  3. Information Circular

    A document sent to shareholders outlining important matters to ...
  4. Money Flow

    Calculated by averaging the high, low, and closing prices, and ...
  5. Price to Free Cash Flow

    A valuation metric that compares a company's market price to ...
  6. Non-Operating Cash Flows

    Cash flows (inflows and outflows) that are not related to the ...
Related Articles
  1. Fundamental Analysis

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  2. Professionals

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
  3. Forex

    Understanding Cash Flow

    Learn about the different types of cash flows and the importance for businesses to properly manage their cash flows.
  4. Economics

    Explaining Capital Flows

    The movement of money for investing, trade or business production, is commonly referred to as capital flows.
  5. Professionals

    Common Stock Valuation

    No one valuation method is perfect for every situation, but by knowing the characteristics of the company, you can select the valuation method that best suits the situation
  6. Fundamental Analysis

    Analyze Cash Flow The Easy Way

    Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
  7. Markets

    Fundamental Analysis: The Cash Flow Statement

    By Ben McClureThe cash flow statement shows how much cash comes in and goes out of the company over the quarter or the year. At first glance, that sounds a lot like the income statement in that ...
  8. Investing Basics

    Free Cash Flow Yield: A Fundamental Indicator

    Free cash flow can measure a business’s performance as if you’re looking at its net income line.
  9. Markets

    Cash Flow Indicator Ratios: Free Cash Flow/Operating Cash Flow Ratio

    By Richard Loth (Contact | Biography)The free cash flow/operating cash flow ratio measures the relationship between free cash flow and operating cash flow. Free cash flow is most often defined ...
  10. Options & Futures

    Stock-Picking Strategies: Fundamental Analysis

    Ever hear someone say that a company has "strong fundamentals"? The phrase is so overused that it's become somewhat of a cliché. Any analyst can refer to a company's fundamentals without ...
RELATED FAQS
  1. How does the Circular Flow Of Income model work?

    Learn about the circular flow of income model used by economists to represent the continuous, interdependent nature of money ... Read Answer >>
  2. What are the main differences and similarities between Money Flow and Real Flow?

    Learn the meaning of the terms "money flow" and "real flow," and find out how they relate to each other as they are used ... Read Answer >>
  3. What are the main differences and similitudes between Money Flow & Real Flow?

    Learn the meaning of the terms "money flow" and "real flow," and find out how they relate to each other as they are used ... Read Answer >>
  4. Why is it important to understand the Circular Flow Of Income when making investment ...

    Find out why investors should pay attention to a firm's circular flow of income model to measure its efficiency and evaluate ... Read Answer >>
  5. What is the difference between cash flow and fund flow?

    See how cash flow and fund flow differ from each other, and why fund flow can be used very differently by accountants and ... Read Answer >>
  6. Why is the Money Flow important for traders and analysts?

    See why the concept of money flow is useful in technical stock market analysis, and how traders and analysts can use money ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center