Circular Flow of Income

One of the most important models used by economists to describe an economy

is the circular flow of income. Circular flow of income diagrams are used to

illustrate the different sectors and markets with in an economy.

Money flows between households and firms through the purchase of goods and

services. There are two sides to every transaction. The business sector uses

labour provided by the household sector to produce goods and services and pays

for this labour. These are then sold to other firms within the business sector and

to households.