Circular Flow of National Income

By Faiz Ahmed Shah

Roll No 4

BBA 3rd Semester Rangers Campus - Islamia University

Bahawalpur

To Prof.Mumtaz Kazmi

Circular flow of income

• A continuous flow of production, income and expenditure is known as circular flow of income.

Circular Flow of National Income

The simple model of the circular flow assumes two players

FirmsHouseholds

Households

• Household is a key player in Economy

• Households purchase goods and services and supply factors of production

Firms

• Firms play a vital role in economy• Firms use factors of production (input) such as

labor , to produce goods and services (output)

Y = C

2 Sector Economy 2 Markets

10,000 $

Factor Payments

(Y)

FirmsHouseholds

Goods and Services

(Q)

Consumption

expenditure(C)

Factor Inputs

FimsHouseholds

Goods and Services

(O)

Factor Inputs

Factor Payments

(Y)

Firms

Households

Consumption

expenditure(C)

10,000 $

2 Sector Economy 3 Markets

(Wages, Rent, Interest and Profits)

Factor Payments

(Y)

FirmsHouseholds

Goods and Services

(Q)

Consumption

expenditure(C)

Factor Inputs

saving

Intrest

Profit

LoanFinancial

institutions

Y = C + IY = C + S

Circular Flow In 3 Sector Economy

FirmsHouseholds

Goods and Services (Q)

Factor Inputs

TaxTax

Bank

Invest

Loan

Factor Payments(Y)

Consumption expenditure

(C)

Y = C + I + Govt InvestY = C + S + Tax

Government