Circular Flow Diagram

Definition

The circular flow diagram is a visual representation of how money, goods, and services flow between households and businesses in an economy. It shows the interdependence between households as consumers and businesses as producers.

Related terms

Factor Market: This is where businesses purchase resources such as labor, land, and capital from households.

Product Market: This is where businesses sell their final goods and services to households.

Government Sector: Represents the role of government in collecting taxes from households, providing public goods, and regulating economic activities.