National Income (Edexcel A Level Economics A)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
The Circular Flow of Income
The circular flow of income is an economic model that illustrates money flows in an economy
There is a simple model which shows the money flows between households and firms
There is a more complex model which adds in other economic agents including the government, financial sector and foreign trade (net exports)
Diagram analysis
Households own the wealth in the economy
These are the factors of production
Households supply their factors of production to firms and receive income as a reward
They receive rent for land, wages for labour, interest for capital, and profit for enterprise
With this income, they purchase goods/services from firms
Firms purchase factors of production from households
They use these resources to produce goods/services
They sell the goods/services to households and receive sales revenue
National income is the value of the output of an economy over a period of time
It can be calculated using the income approach or expenditure approach
Expenditure = income
Income is a flow in the economy, whereas wealth is a stock of assets that can be used to generate income
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