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.

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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 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 >>
  3. 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 >>
  4. 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 >>
  5. Why is the Money Flow important for traders and analysts?

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  6. What's the difference between free cash flow and operating cash flow?

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