The circular flow of income is a key concept in being able to apply the multiplier effect.
The model below highlights the flows of income between households and firms along with the potential injections and withdrawals that an economy experiences.
One key to remembering the diagram is that households control the factors of production and for each of these factors, firms have to pay an income to households for usage. The list is....
On the other side of the diagram income flows from households to firms because...
The model below highlights the flows of income between households and firms along with the potential injections and withdrawals that an economy experiences.
One key to remembering the diagram is that households control the factors of production and for each of these factors, firms have to pay an income to households for usage. The list is....
- Land > Generates rent for households.
- Labour > Generates wages and salaries for households.
- Capital > Generates interest for households.
- Enterprise > Generates profits and dividends for households.
On the other side of the diagram income flows from households to firms because...
- Goods and services > Generate revenue for firms (consumer expenditure).
Circular Flow of Income Model
