Use the idea of the circular flow diagram to explain why the value of production equals total income equals total expenditure

What will be an ideal response?

The basic point is that nothing escapes the system. Firms receive the value of their production in the form of revenue. With this revenue, they pay for the factors of production they hire and what is left over after paying their costs is profit, which is paid to the households that own the firms. Thus the value of production equals total income. These incomes flow from firms to households. Households then allocate their income to taxes, saving, and consumption. Taxes are collected and spent by the government. Saving by households is spent as investment by firms after being cycled through the banking system. Thus total expenditure equals the value of total income, which equals the value of production by firms.