Equivalence of Income, Output, and Expenditure Approaches

The circular flow of income model shows how national output (O), national income (Y) and national expenditure (E) are three ways of measuring the same overall economic activity, linked by flows between households, firms and government. The model also introduces leakages (savings, taxes, imports) and injections (investment, government spending, exports) and explains that equilibrium occurs when total leakages equal total injections. Understanding these relationships is important for analysing how fiscal policy or other changes affect aggregate activity and for interpreting GDP measures such as nominal GDP.