Circular Flow Model

Definition

The circular flow model is an economic concept that illustrates how money flows through an economy between households and firms. It shows how households supply factors of production to firms in exchange for income, which is then used to purchase goods and services from firms.

Related terms

Factors of Production: These are the resources used in the production process, including land, labor, capital, and entrepreneurship.

Gross Domestic Product (GDP): It measures the total value of all final goods and services produced within a country's borders during a specific period.

Consumption Expenditure: It refers to spending by households on goods and services. It is one of the components that make up GDP.