Circular flow
Model of income flows between households and firms.
Circular flow of income
Key definitions
Injections
G, I, X add to the circular flow.
Withdrawals
S, T, M leak from the circular flow.
Closed economy
No foreign trade in the basic model.
Open economy
Includes imports and exports.
Income
Flow — wages, rent, interest, profit.
Wealth
Stock — assets owned at a point in time.
National income
Total income in the economy in a period.
O = E = Y
Output equals expenditure equals income.
Wealth effect
Higher assets may raise consumption.
Key concepts
Injections must equal withdrawals at equilibrium.
Wealth is a stock; income is a flow.
Relevant tips
- Diagram backlog: circular flow; injections/withdrawals overlay.
- Link to multiplier and GDP measurement.
Examples & case studies
- Diagram backlog: circular flow and injections/withdrawals.