Circular Flow of Income in Macroeconomics

The circular flow of income is a fundamental concept in macroeconomics that deals with how the different participants in an economy earn and spend their incomes.

 In this segment, you will learn more about the circular flow of income and also understand the two-sector, three-sector and four-sector models of the economy. 

So, in the video, you learnt how income flows in an economy. You learnt how the economy is modelled by simplifying it to two-sector, three-sector and four-sector models. The sectors involved in these models include the following:

• Households and Businesses (also referred to as Producers) in the two-sector model
• Households, Businesses and Government in the three-sector model
• Households, Businesses, Government and Foreign Trade in the four-sector model

You also learnt how this circular flow of income is affected by way of: 

• Injections:  This refers to how money is injected into an economy through various measures in order to boost economic activity during times when the economy is slowing down. 
• Leakages: This refers to how money ‘leaks out’ of an economy, i.e., it is no longer a part of the circular flow of income. 

Through the example of the economy of North Dakota, a state in the US, you learnt how income actually circulates in an economy. 

In the next segment, you will learn how an economy is measured through its Gross Domestic Product (GDP).

Additional Learning 

Read this article which talks about the circular flow of income and its importance.