The circular flow model is a key concept in macroeconomics, showing how money and goods move between and . It illustrates the continuous cycle of income, spending, and production that drives economic activity.
This model helps us understand how different parts of the economy are connected. By looking at and , we can see how changes in one area, like increased savings or , affect the whole economy.
Circular flow model
Core components and functioning
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Simplified representation of economic activities illustrating flow of goods, services, and money between sectors
Demonstrates continuous cycle of income from producers to households and back
Basic form consists of two main sectors (households and firms) connected by two markets (goods/services and factor markets)
Inner flow represents movement of real goods and services
Outer flow represents monetary transactions
Can be expanded to include government, financial institutions, and foreign trade