The circular flow of income has three interlinked phases: the production phase (goods and services are produced, generating value added), the distribution phase (that value is distributed as factor incomes — rent, wages, interest, profit), and the disposition phase (the income is disposed of as expendi …

The three phases

Income flows in a continuous circle through three connected stages:

1. Production phase — firms produce goods and services, creating value added (the source of all income).
2. Distribution phase — the value created is distributed among the factors of production as rent, wages, interest and profit (the income phase).
3. Disposition phase — households and firms dispose of that income by spending it (the expenditure phase), which again buys the output, closing the loop.

Because the same total appears as output, as income, and as expenditure, national income can be measured by three methods matching these phases.

Why the other options are wrong

• (A) replaces "distribution" with "consumption" — consumption is only a part of the disposition phase, not a distinct phase. …