Economics-For Managers

Circular flow of income takes place between business firms, households and the government. To produce goods and services, households provide their services and in return they get wages. Similarly, when households buy goods and services, they pay for them and the producers receive the money as their income. So, there is circular flow of income. This is the circular flow of income in a two sector economy.

However, this circular flow can also be shown to take place in a three sector or four sector model of the economy. National income is the total income earned by current factors of production. The understanding of national income helps in measuring the performance of an economy. There are three approaches to measure national income: product, income and expenditure approaches.

Apart from national income, there are other aggregate measures which are also used to measure the performance of an economy.