Definition: A diagram showing how money, goods, and resources flow between households and businesses in an economy.
In the simple circular flow, households supply labor and receive income; businesses supply goods and receive revenue. Money flows one direction, goods and services the other. Adding government (taxes, spending) and the foreign sector (imports, exports) makes it more complete. The model shows how spending becomes income becomes more spending.
You work for a company (labor flows to business), receive a paycheck (money flows to you), and spend at stores (money flows back to businesses), which employ workers... The cycle continues.
The circular flow model is essential for understanding GDP and macroeconomic relationships. It
Category: AP Economics