Economics Circular Flow Model

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)