Circular Flow of Income
Macroeconomics
A model illustrating how money, goods, services, and resources flow between households, firms, the government, the financial sector, and the foreign sector in an economy.
Curves and Elements
households
Households: Provide factors of production and receive income. Use income to consume goods and services.
firms
Firms: Produce goods and services using factors of production. Pay income to households and receive revenue from sales.
government
Government: Collects taxes and injects spending into the economy, influencing both households and firms.
banks
Financial Sector (Banks): Facilitate savings and investments, linking households and firms.
world trade
Foreign Sector (World Trade): Introduces imports (leakages) and exports (injections), affecting the overall flow of income.
Households provide factors of production (land, labor, capital, and entrepreneurship) to firms and receive income in return.
Firms use these factors to produce goods and services, which they sell to households.
Households pay for these goods and services, creating a flow of consumer expenditure back to firms.
Savings from households go to banks, which provide investments back into the economy, especially to firms.
The government collects taxes from households and firms and injects money back into the economy through government spending.
International trade introduces imports (leakage) and exports (injection) into the circular flow through interactions with the global economy.
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