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Three major flows in the economy

An increase in the production of goods and services leads to an increase in income which in return increases spending.


The determination of the total production of goods and services is an important issue in macroeconomics.  

We produce goods and services in order to consume those goods and services and thereby satisfy some of our needs and wants.  The amount goods and services we can consume, depends on how much we can spend on these goods and services.  The amount we can spend in return depends on our income, which is derived from taking part in the process of production.  A continuous circular flow between production, income and spending takes place in the economy.

Three important flows can therefore be distinguished in the economy.  They are production, income and spending.  

By taking part in the process of production through selling factors of production an income is earned in the form of wages and salaries, rent, interest and profits.  This income is then spent to buy the goods and services that were produced.