The circular flow indicates flow of national income in an economy among various agents – households, business people and the government. For example, in a simple two sector economy, the business entities employ laborers who are from the household sector. These household spends their income in the goods and services produced by business entities. Hence an income goes from business firms to households in the form of wage payment whereas a return income flow happens from the households to business entities in the form of payments to goods and services.
