Circular flow

Circular Flow

Gives: Receives:

Gives: Money Income Receives: Labour, land, capital

Gives: Gooods and services Receives: Consumpstion Expenditures

Gives: Revenue Receives: goods and sevices

Gives: Costs Receives: factors of production

Households

Product Market

Businesses

Factor Market

government is a buyer (demand) in both the product and resource markets. Government provides public goods, public services, and transfer payments to households and firms in exchange for tax payments.

Goverment

The circular flow diagram illustrates the interdependence of the “flows,” or activities, that occur in the economy, such as the production of goods and services (or the “output” of the economy) and the income generated from that production. The circular flow also illustrates the equality between the income earned from production and the value of goods and services produced. Of course, the total economy is much more complicated than the illustration above. An economy involves interactions between not only individuals and businesses, but also Federal, state, and local governments and residents of the rest of the world. Also not shown in this simple illustration of the economy are other aspects of economic activity such as investment in capital (produced—or fixed—assets such as structures, equipment, research and development, and software), flows of financial capital (such as stocks, bonds, and bank deposits), and the contributions of these flows to the accumulation of fixed assets.