Businesses provide individuals with income (in the form of compensation) in exchange for their labor. Īlternatively, one can think of these transactions in terms of the monetary flows that occur. These activities are represented by the green lines in the diagram. In its most basic form it considers a simple economy consisting solely of businesses and individuals, and can be represented in a so-called "circular flow diagram." In this simple economy, individuals provide the labour that enables businesses to produce goods and services. The circular flow of income is a concept for better understanding of the economy as a whole and for example the National Income and Product Accounts (NIPAs). Overview Model of the circular flow of income and expenditure Richard Stone further developed the concept for the United Nations (UN) and the Organisation for Economic Co-operation and Development to the system, which is now used internationally. Important developments of Quesnay's tableau were Karl Marx's reproduction schemes in the second volume of Capital: Critique of Political Economy, and John Maynard Keynes' General Theory of Employment, Interest and Money.
François Quesnay developed and visualized this concept in the so-called Tableau économique. The idea of the circular flow was already present in the work of Richard Cantillon. The circular flow analysis is the basis of national accounts and hence of macroeconomics. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. 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. The functioning of the free-market economic system is represented with firms and households and interaction back and forth. Basic diagram of the circular flow of income. Money flows in the opposite direction from goods and services. The flow of money is shown with purple, and the flow of goods and services is shown with orange. This graph shows the circular flow of income in a five-sector economy. Not to be confused with Circular economy.
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