Question

What is the circular flow of income?

• A. It shows the flow of national income in an economy.
• B. It shows the flow of income of only an individual.
• C. It shows the flow of income of an industry.
• D. None of the above.

Answer 1

The correct option is A It shows the flow of national income in an economy.

Circular flow of income refers to the flow of national income between the various economic agents.

The term 'economic agents' refers to the households in the economy, who provide factors of production and earn income; the firms in the economy, who employ factors of production and sell output produced to generate revenue; and the government who plays an active role in providing the economic infrastructure and collects revenue for the same.