Circular Flow Model Diagram. 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. Circular flow of income is an integral concept in economics as it describes the foundation of the transactions that build an economy.
Circular flow diagram is a visual model of the economy that shows how dollars flows through markets among households and firms. A circular flow model of the economy is a graphical representation of the movement of money between three sectors businesses households and the government and three markets production factors products and the financial market. The circular flow diagram pictures the economy as consisting of two groups households and firms that interact in two markets.
A circular flow model of the economy is a graphical representation of the movement of money between three sectors businesses households and the government and three markets production factors products and the financial market.
It illustrates the interdependence of the flows or activities that occur in the economy such as the production of goods and services or the output of the economy and the income generated from that production. The most common form of this model shows the circular flow of income between the household sector and the business sector. Market for goods and services where households purchase goods and services from firms in exchange for money. The goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees.
