Circular Flow Diagram For A Closed Economy. The circular flow of income diagram models what happens in a very basic economy. Firms take those factors and combine them in the production process to produce finished goods or services and sell them to households.
Firms take those factors and combine them in the production process to produce finished goods or services and sell them to households. In the very basic model we have two principal components of the economy. One of the main basic models taught in economics is the circular flow model which describes the flow of money and products throughout the economy in a very simplified way.
It assumes that it is a closed economy without any external interference of foreign countries i e.
In the inner flow households are assumed to own the factors of production which they sell to firms in factor markets. It assumes that it is a closed economy without any external interference of foreign countries i e. Some of these drawbacks are rectified in the three sector model. Circular flow model of closed economy.
