Macroeconomics: Theory and Policy

2

The Circular Flow of Income and Expenditure

After studying this topic, you should be able to understand

• In a two sector economy, the sum total of the factor incomes earned by the households is equal to the total of the expenditures by the households on the goods and services.
• There exist withdrawals and injections, which prevent the circular flow of income and money from remaining constant.
• The main source of revenue for the government is through taxes.
• The government may follow a balanced, deficit or a surplus budget.
• A flow of income may exist between the government sector and the capital market.
• The import and export of goods and services influence the circular flow of income.
• In general, the exports of a country are rarely equal to the ...