Circular Flow of Income

As we can see from the above diagram, the flow of income throughout an economy travels through four primary routes. Households and individuals supply businesses with the factors of production to create goods and services, and in return those businesses supply the goods and services. To pay for these goods and services, consumers use money and spend money; this expenditure is used to fund the businesses' production costs. To repay individuals and households for their labor and factors of production, businesses provide income in the form of wages, rent, profit, and interest in the fourth and final route. And thus, income flows from the households and businesses in an economy in a complete, repetitive cycle.