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 of income is a model that depicts the flow of money and goods between households and businesses in an economy. It shows how money is earned, spent, and re-earned in a continuous loop.

In this model, households are the suppliers of factors of production, such as labor, land, and capital. These factors are provided to businesses, which use them to produce goods and services. In return, businesses pay wages, rent, interest, and profits to households as income.

Households then use this income to purchase goods and services from businesses, creating a flow of spending. Businesses, in turn, use this revenue to pay for the factors of production and to invest in new capital, creating a flow of income.

This circular flow of income continues as households earn income, spend it on goods and services, and businesses use that spending to generate income. The model also includes government and international sectors, which can influence the flow of income through taxation, government spending, and international trade.

Overall, the circular flow of income illustrates the interdependence between households and businesses in an economy, showing how money and goods flow between them, creating a continuous cycle of production, income, and spending.