Richard Melson

December 2005

Circular Flow

The Circular Flow of Economic Activity

J. Bradford DeLong

The flow of payments in an economy is a circular flow.

Individuals--people living in households--work for businesses, rent their property (or their capital) to businesses, and manage and own the busineses. All these activities generate incomes--flows of payments from businesses to households. But households then spend their incomes--on consumption goods, in taxes paid to governments (that then spend the money on goods and services), and on assets like stock certificates and bank CDs that flow through the financial sector and are then used to buy investment and other goods. All these are expenditures.

The two flows--of incomes and of expenditures--are equal: all expenditures on products are ultimately someone's income, and every piece of total income is also expended in some way.

The Circular Flow The Expenditure Side of the Circular Flow Flows:

Incomes, Expenditures, Factors, and Goods

Professor of Economics J. Bradford DeLong

601 Evans Hall, #3880, University of California at Berkeley

Berkeley, CA 94720-3880

(510) 643-4027 phone (510) 642-6615 fax

This document:

Circular Flow Brad DeLong

December 12, 2005