Production is the result of collection efforts of various factors of production. Factors engaged is production process get their award land, labour capital and entrepreneurship get rent, wage, interest and profit respectively commercial firms make use of these factors for producing goods and services. These factors of production are not only suppliers of factors of producers, but they are consumers also. These factors earn their income on consumption commercial firms sell their product, earn income and again spend on completing production activity Thus, flow of income, income to consumption, consumption to expenditure and again expenditure to income and production. Thus, circular flow of income earning economic activities takes place in the economy.
Hence the circular flow of income refers to flow of money income or the flow of goods and services across different sectors of the economy in a circular flow.
