Circular Flow Of Income Diagram In An Open Economy. The circular flow analysis is the basis of national accounts and hence of macroeconomics. The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money goods and services etc.
For example firms have to pay workers to produce the output. The circular flow of income in four sector economy can be explained by the flowing diagram. Households sell their factor services to firms in the factor markets and in exchange receive wages the left hand side of the flow.
The basic model of the circular flow of income considers only two sectors the firms and the households which is why it is called the two sector economy model.
Likewise people of other countries purchase goods and services not produced domestically i e exports. We can see this circular flow in figure 1. Figure 1 circular flow of income. In the meantime households spend this income on goods and services in the goods market and in exchange receive the goods and services themselves the right hand side of the flow.
