The circular flow of income is a closed economy.

The circular flow of income in an economy. 

3.4 simple circular flow of income in a closed economy

This is a pattern of expenditure on output and factor services passing between the domestic firms and the domestic household sectors.

Assumptions

A simple economy made up of two sectors, the business sectors (firm) and households (comprises of consumers). Households are assured o own all the factors of production ( productive resources)

All production is assured to be via the business sector

The economy is in a state where it is not involved in trade with other countries firms keep production exactly equal to sale (so there is inventories or stock pilling ).

All income received by the household is spent on the purchase of goods and services produced by the firms.