The Circular Flow.
This circular flow shows how money and goods move around in the economy, keeping things
running smoothly.
In a closed economy, the circular flow model outlines how money, goods, and services
circulate among households, firms, and the government.
Real Flow- Flow or movement of goods, services and factors of production.
Money Flow- Flow or movement of money.
1. Households: These are regular people or families who work and earn money. They use
this money to buy things they need or want.
2. Firms: These are businesses that produce goods or provide services. They hire workers
from households and pay them for their work. In turn, firms sell their products to households.
3. Government: This is the entity that collects taxes from both households and firms. It uses
this money to provide public services like roads, schools, and healthcare. Sometimes, the
government also gives money to households in the form of benefits or aid.
4. Factor Market:
- Definition: The factor market is where the factors of production (such as labor, land,
capital, and entrepreneurship) are bought and sold.
- Example: When firms hire workers and pay them wages or salaries in exchange for their
labor, this transaction occurs in the factor market. Similarly, when firms rent land or purchase
capital goods like machinery, these transactions also take place in the factor market.
This circular flow shows how money and goods move around in the economy, keeping things
running smoothly.
In a closed economy, the circular flow model outlines how money, goods, and services
circulate among households, firms, and the government.
Real Flow- Flow or movement of goods, services and factors of production.
Money Flow- Flow or movement of money.
1. Households: These are regular people or families who work and earn money. They use
this money to buy things they need or want.
2. Firms: These are businesses that produce goods or provide services. They hire workers
from households and pay them for their work. In turn, firms sell their products to households.
3. Government: This is the entity that collects taxes from both households and firms. It uses
this money to provide public services like roads, schools, and healthcare. Sometimes, the
government also gives money to households in the form of benefits or aid.
4. Factor Market:
- Definition: The factor market is where the factors of production (such as labor, land,
capital, and entrepreneurship) are bought and sold.
- Example: When firms hire workers and pay them wages or salaries in exchange for their
labor, this transaction occurs in the factor market. Similarly, when firms rent land or purchase
capital goods like machinery, these transactions also take place in the factor market.
