Circular Flow of Income illustrates how output generates income which is then spent, coming full circle through the economy the relationship between governments,

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Presentation transcript:

Circular Flow of Income illustrates how output generates income which is then spent, coming full circle through the economy the relationship between governments, households, firms, and the foreign sector income = expenditure = output

A Simple 2-Sector Model Wages, Rent, Dividends Labour Goods & Services Consumption Spending

A more complex model… Note: injections & withdrawals can happen at any stage in the model

Wealth vs. Income Wealth: the sum of all assets in an economy (a stock concept) Income: the money generated from that wealth (a flow concept) Greater wealth leads to greater income (which can explain why differences between rich & poor can widen without gov’t intervention)