The circular flow of income refers to the continuous flow of money between two main sectors - the household sector and the business sector. The business sector uses factors of production like labor, capital, land, and entrepreneurship from households to produce goods and services. In return, households receive factor incomes like wages, rent, interest and profits. Households then use this income to purchase goods and services from businesses, completing the circular flow. This circular flow involves both a real flow of goods and services and a monetary flow as incomes are generated and spent between the two sectors.

1. Circular flow of Income
By :-Imran khan (PGT)

2. CIRCULAR FLOW OF INCOME
 The human wants are unlimited and recurring.
 Human satisfy their wants by purchasing
goods and services.
 For satisfy human wants production is
necessary and production is continuous
process.
 In the production process many factor of
production like land labour, Capital,
Enterprises are combined together.

3. FACTOR OF PRODUCTION

4.  For the production of any product two sector
are involved
 Household and Firm
 Firm produces goods and services with the
collective efforts of factor of production
supplied by the household sector.

5. Household:-A household consists of one or several persons who live
in the same dwelling and share meals. It may also consist of a single
family or another group of people. The household is the basic unit of
analysis in many social, microeconomic and government models,
and is important to economics and inheritance.

6. Firm:-A firm is a commercial enterprise, a company that buys and sells
products and/or services to consumers with the aim of making a profit.
In the world of commerce, the term is usually synonymous with
‘company’, or ‘business’

7. Factor of payment
 Firm makes payment to the factor of production in
the form of rent, wages,interest, profit.
 It is also known as factor income.

8.  The household spends our money on the
purchase of goods and services produced by
the firm and satisfy their wants.

9. Meaning of circular flow of
income
 It refers to cycle of generation of income in
the production process ,its distribution among
the factor of production and finally, its
circulation from household to firm in the form
of consumption expenditure on goods and
services produced by them.

10. Phases of circular flow of
Income
Production phase
Generation of income
Income phase
Distribution of income
Disposition phase
Disposition of Income

11. Stock and Flow
 Stock variable refers to that variable which is
measured at a particular point of time. Stock
variable are not time dimensional.
 For example:- amount deposits on 31-03-2021,
population of India in 31 march2020etc
 Flow variable refers to that variable which is
measured over a period of time. Flow variable are
time dimensional. The period of time could be a
day, a week, a month etc
 For example:- Losses, production of cement in the
year 2019,saving, national income of a country.

12. CIRCULAR FLOW OF INCOME IN A TWO SECTOR
MODEL
LAND,LABOUR,CAPITAL,ENTERPRISES
RENT,WAGES,INTREST,PROFIT
CONSUMPTION EXPENDITURE
FACTOR OF PRODUCTION
FACTOR OF PAYMENT
GOODS AND SERVICES
Real
flow
Money
flow

13. Open and Closed economy
 Closed economy:- It is an economy which has no economic
relation with the rest of the world. However in the current
scenario there is hardly any country which does not have any
economic relations with other nations.
 A closed economy has 3 sector :-Household, firm, Govt.
 Open economy:- It is an economy which has economic relation
with the rest of the world. In the current scenario all the nations
have economic relations with other nations.
 A open economy has 4 sector :-Household, firm, Govt., Foreign
sector.