Answer to Question #213581 in Macroeconomics for Sakib

Question

Explain the circular flow of income in an economy. what does it measure?

Answer 1

The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow analysis is the basis of national accounts and hence of macroeconomics.

The circular flow model demonstrates how money moves from producers to households and back again in an endless loop. In an economy, money moves from producers to workers as wages and then back from workers to producers as workers spend money on products and services.