Circular Flow of Income

You pay your college fees; the college pays its faculty; a faculty member buys groceries; the grocer buys stock from a wholesaler who pays a farmer. Money keeps moving in a loop, and no rupee sits still for long. That loop, scaled up to the whole economy, is what economists mean by the circular flow of income — and it is the picture behind every macroeconomic idea you will meet from here on, including national income itself.

In two minutes

The circular flow of income shows how money, goods and services and factors of production move continuously between households and firms (and, in the fuller version, government and the rest of the world), and it is the basic model behind how national income is measured.

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