The circular flow analysis is the basis of national accounts and hence of macroeconomics. Markets for goods and services.
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.
Simple circular flow model. 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 idea of the circular flow was already present in the work of richard cantillon. To provide goods and services to households the product market purchases them from businesses generating revenue.
Here s how it works. When households need a good or service their money flows to the product market in a process called consumer spending. 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.
The circular flow model of consumer income and spending moves in the opposite direction to the classic model incorporating goods and services and production factors. The circular flow model is used to illustrate the movement of money in a given society. The flows of money and goods exchanged in a closed circuit correspond in value but run in the opposite direction.
The model represents all of the actors in an economy as either households or firms companies and it divides markets into two categories. According to the flow money flows in from the producers gets to the workers who are paid in terms of wages. Understanding the circular flow model the circular flow model starts with the household sector that engages in consumption spending c and the business sector that produces the goods.
In the simple circular flow model of the free market money flows in the opposite direction. In simple terms the circular flow model illustrates the cyclical flow of money as it moves between households and firms.