Explain, using examples, what is meant by the circular flow of income.

The circular flow of income shows the flows of money between households and firms. Money flows from consumers to firms through consumer spending. Conversely, households recieve an income through a firm's demand for the factors of production - land, labour, capital and enterprise. An example of this income are wages paid to labour. These flows of income represent a method for calculating national income or Gross Domestic Product. In an open economy, these flows are interrupted. Leakages, through savings, taxation and imports will decrease the amount of money flowing from households to firms. Injections such as government spending, exports and increased spending on capital will multiply the flow of incomes and thus lead to increased flows and output. An economy is said to be in equilbrium when leakages (or withdrawals) equal injections. These components are represented by introducing the government and the rest of the world as separate actors in the circular flow of income.