The Circular Flow of the Economy



The Circular Flow of the Economy

Introduction

The circular flow of income describes the relation between the households and the firms in different sectors of the economic system. It depicts the flow of goods and services and factors of production between firms and households (Tutor 2 u). Organizations or firms produce goods and services through factors of production (land, labor, capital and enterprise) and in return they provide factor rewards (rent, wages, interest and profit).

Households provide firms with factors of production and firms in return provide households with factor rewards. These factor rewards again go the firms ...