Firms pay households for the resources that make the goods

Picture an economy with only two groups, households and firms. Households provide the labour and other resources firms need to produce goods and services: work, land, capital and enterprise. In return firms pay for those inputs as wages, rent, interest and profit. Every pound a firm pays out for them becomes income for a household.

Households spend that income on what firms produce

Households use their income to buy goods and services, and what they pay becomes the firms' revenue. Firms use that revenue to pay for inputs again, so the same pound goes round: from firms to households as income, and back to firms as spending. In this simple economy income, spending and output are three views of one flow.