- The circular flow of income shows how money moves in an economy.
- It assumes only a private sector and a household sector.
- Households provide factor services (entrepreneur, labor, capital, natural resources).
- Enterprises use these inputs to produce goods and services.
- Enterprises pay factor payments (profit, wages, rent, interest) to households.
- Households spend this income to purchase goods and services from enterprises.
- This money flows back to enterprises, completing the circle.
- The aggregate value of goods and services moves circularly.
