4.2.1—Circular flow of income

In a closed economy, households provide factors to firms and receive income, then spend on firms’ output. Government collects taxes and spends; in an open economy exports and imports connect the flow to the international sector.

Real flows are resources and goods; money flows are wages, rent, interest, profits and expenditure. Each receipt for one sector is spending or income for another.

A household receives wages from a firm, buys its output, pays tax to government and may buy an imported good; exports bring spending into the domestic flow.

The circular flow is not a claim that every pound circulates instantly or that saving disappears; it describes linked flows over a period.