Economics Circular Flow Model

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What do households receive from selling their factors of production to businesses?

Income

What is the main function of the Financial Sector in the circular flow of economics?

To facilitate the flow of money between households, businesses, government, and foreign sector

What do foreign countries and their citizens do in the circular flow of economics?

Export goods and services to domestic households and businesses

What do businesses use to produce goods and services?

Factors of production (land, labor, capital, entrepreneurship)

What does the Government Sector do to affect the economy?

Regulate economic activity through laws and policies

What do households do with a portion of their income?

Save a portion of it, which is deposited into financial institutions

Study Notes

Circular Flow of Economics

The circular flow of economics illustrates the flow of goods, services, and money between different sectors of the economy.

Household Sector

  • Consists of individuals and families who own factors of production (land, labor, capital, entrepreneurship)
  • Receive income from selling factors of production to businesses
  • Spend income on goods and services produced by businesses
  • Save a portion of income, which is deposited into financial institutions

Business Sector

  • Consists of firms that produce goods and services
  • Use factors of production (land, labor, capital, entrepreneurship) to produce goods and services
  • Sell goods and services to households and the government
  • Pay households for factors of production
  • Invest in capital goods and technology to increase productivity

Foreign Sector

  • Consists of foreign countries and their citizens
  • Export goods and services to domestic households and businesses
  • Import goods and services from domestic households and businesses
  • Receive income from exports and pay for imports
  • Affect the domestic economy through trade balance and exchange rates

Financial Sector

  • Consists of financial institutions (banks, stock markets, bond markets)
  • Facilitate the flow of money between households, businesses, government, and foreign sector
  • Provide loans to households and businesses for investment and consumption
  • Accept deposits from households and businesses
  • Facilitate savings and investment

Government Sector

  • Consists of central, state, and local governments
  • Collect taxes from households and businesses
  • Provide public goods and services (infrastructure, education, healthcare, defense)
  • Regulate economic activity through laws and policies
  • Redistribute income through transfer payments (social security, welfare)

Understand the circular flow of economics, including the roles of households, businesses, government, foreign sector, and financial institutions in the economy. Learn how goods, services, and money flow between these sectors.

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