By Tejswini B on wallstreetmojo.com
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The circular flow of income is an economic model that describes how money is exchanged in the production, distribution, and consumption of goods and services. It is also known as a two-sector economy model and considers only two sectors, firms and households. The three-sector and four-sector economy models take into account additional factors such as the role of the government, national income, and foreign trade. The circular flow of income helps to calculate macroeconomic factors such as GDP and per capita income, which are used to formulate economic policies.