The document explains the concept of the circular flow of national income, highlighting the interaction between households and firms in an economy. It describes how households provide factors of production to firms, which in turn produce goods and services that households purchase. Additionally, it outlines the flow of factor payments and expenditures in a three-sector economy, including the roles of financial institutions and government taxation.

1. Circular Flow of
National Income
By Faiz Ahmed Shah
Roll No 4
To Prof.Mumtaz
Kazmi
BBA 3rd Semester
Rangers Campus -
Islamia University
Bahawalpur

2. Circular flow of income
• A continuous flow of production,
income and expenditure is known as
circular flow of income.

3. Circular Flow of National Income
The simple model of the circular flow assumes two
players
Households Firms

4. Households
• Household is a key player in Economy
• Households purchase goods and services
and supply factors of production

5. Firms
• Firms play a vital role in economy
• Firms use factors of production (input) such as
labor , to produce goods and services (output)

6. Factor
Payments
(Y)
Factor Inputs
Households Fims
Y = C
2 Sector Economy 2 Markets
10,000 $
Factor Inputs
Households Firms
Goods and
Services
Goods and
Services
(Q)
(O)
Consumptio
n
(C)
Firms
Household
s
Consumpti
on
expenditure
10,(0C0)0 $

7. 2 Sector Economy 3 Markets
(Wages, Rent, Interest and Profits)
Factor
Payments
(Y)
Factor Inputs
Households Firms
Goods and
Services
(Q)
Consumptio
n
expenditure
(C)
savin
g
Intres
t
Profi
t
Loa
Financial n
institution
s
Y = C + I
Y = C + S

8. Circular Flow In 3 Sector Economy
Factor Payments
(Y)
Factor Inputs
Bank
Loan
Tax Tax
Households Firms
Invest
Goods and
Services (Q)
Consumption
expenditure
(C)
Y = C + I + Govt Invest
Y = C + S + Tax
Governme
nt