The Circular flow of income

The circular flow of income is a neo classical economic theory model depicting how money flow through the economy. In the simplest version the economic is a model bas consisting only of households and firms.  

There are two groups- households & firms.

1.     Households provides service to firm in exchange for wages and firms sell products to household in exchange for income.

2.     It indicate that some income levels this circular flow as leakage while other income (expenditure) is added as injection.

3.     The circular follow of income will be put back into the circular flow through general government expenditure.

4.     Both firms and individuals are subject to taxes and those money is with draw from circular flow

5.     Saving undertaken by the firms, individual and government also represents leakage from the circular flow of the money

6.     Investment are corresponding to as inflow into the circular flow of income

7.     Export or are seen as entering foreign money into the domestic economy

8.     While importers can be viewed as money living from the economic thus creates further leakage.