Introduction
The circular flow of income is a fundamental concept in macroeconomics that depicts the continuous flow of money and resources between different economic agents. This model provides a simplified framework for understanding how economic activity generates income and expenditure within an economy. This essay will focus on the circular flow of income in a closed economy, which excludes international trade, to highlight the core relationships between key economic actors.

Key Actors in the Circular Flow
The circular flow of income in a closed economy involves two primary actors: households and firms. These actors engage in a continuous cycle of exchange, contributing to the overall economic activity within the system.

⭐Households are the owners of the factors of production, which include land, labor, capital, and entrepreneurship. They provide these factors to firms in exchange for income. Households also serve as consumers of goods and services produced by firms.
⭐Firms are producers of goods and services, employing factors of production supplied by households to create output. They sell these products to households, generating revenue. Firms also pay wages, rent, interest, and profit to households as compensation for their factors of production.


Flows within the Model
The circular flow of income model depicts two main flows between households and firms:
1. Real Flow (Physical Flow)

⭐Factors of production flow from households to firms. This involves households providing their labor, land, capital, and entrepreneurial skills to firms for production activities.
⭐Goods and services flow from firms to households. Firms use the factors of production to produce goods and services, which they then offer for sale to households.

2. Money Flow

⭐Factor payments flow from firms to households. Firms compensate households for the use of their factors of production in the form of wages, rent, interest, and profit. This flow represents the income earned by households from their economic activities.
⭐Consumer expenditure flows from households to firms. Households use their earned income to purchase goods and services produced by firms, creating demand for their products.


Injections and Withdrawals (Leakages)
The closed economy model is a simplification, as it does not account for government spending, taxes, and international trade. In a more realistic model, these factors represent injections and withdrawals (leakages) from the circular flow.

⭐Injections introduce additional money into the circular flow. Investment by firms, government spending on infrastructure or social programs, and exports represent injections.
⭐Withdrawals remove money from the circular flow. Savings by households, taxes collected by the government, and imports represent withdrawals.

These factors can significantly influence the overall level of economic activity. For instance, increased government spending can boost demand, while higher taxes can lead to a decrease in household spending.

Conclusion
The circular flow of income model in a closed economy illustrates the continuous interaction between households and firms. The flow of resources, goods and services, income, and expenditure creates a dynamic system where economic activity is interconnected. In this simplified model, the flow of income generated by firms is spent by households on goods and services, creating demand for further production. However, a more comprehensive model would need to consider injections and withdrawals to reflect the reality of open economies.

Sources:

Mankiw, N. G. (2021). Principles of macroeconomics. Cengage Learning.
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2018). Economics. McGraw-Hill Education.