| Definition |
Economic model that shows continuous movement of income and expenditure between different sectors of the economy. |
Basic model showing the flow of income between households and firms without involving other sectors. |
| Components |
Involves households, firms, government, financial institutions, and foreign sector. |
Includes only two sectors: households and firms. |
| Complexity |
Comprehensive and complex model of real-world economies. |
Simplified version ideal for introductory understanding. |
| Types of Flow |
Includes real flow (goods and services) and money flow (payments). |
Primarily focuses on basic real and money flows between two sectors. |
| Leakages and Injections |
Includes leakages (savings, taxes, imports) and injections (investment, government spending, exports). |
Does not account for leakages or injections. |
| Realism |
More realistic and representative of actual economic operations. |
Highly theoretical and abstract in nature. |
| Government Role |
Government is included as a sector that taxes and spends. |
No role of government in this model. |
| Foreign Sector |
Includes exports and imports with rest of the world. |
No inclusion of foreign trade or sector. |
| Financial Sector |
Includes banks and other financial institutions for savings and investments. |
Excludes financial sector activities. |
| Flow Direction |
Multidirectional and continuous, with inter-sectoral linkages. |
Unidirectional flow between households and firms. |
| Income Distribution |
Accounts for redistribution through taxes, subsidies, and transfers. |
No redistribution is considered. |
| Market Involvement |
Involves both product and factor markets along with financial and government markets. |
Only includes product and factor markets. |
| Purpose |
To analyze the functioning of the entire economy with interdependencies. |
To explain basic income flow between producers and consumers. |
| Examples |
Four-sector or five-sector models (e.g., households, firms, government, financial institutions, foreign). |
Two-sector model (households and firms only). |
| Use in Macroeconomics |
Foundation for national income accounting and economic analysis. |
Introductory tool for understanding income circulation. |
| Assumptions |
Assumes open economy with multiple interacting agents. |
Assumes closed economy with no external or government influence. |
| Income Generation |
Income generated and circulated through multiple sources and uses. |
Income generated by firms and consumed by households. |
| Feedback Loop |
Continuous feedback loop among sectors maintains economic equilibrium. |
Limited feedback between two sectors; assumes balance. |
| Practical Application |
Used in policy-making, economic forecasting, and analysis. |
Mainly for conceptual understanding and teaching basics. |
Circular Flow vs Simple Flow of Income