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If you clicked on our link you are interested in knowing about the Circular Flow Model! By the time you finish going everything on this wall you will understand how the model represents how markets work!

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https://www.thoughtco.com/the-circular-flow-model-of-the-economy-1147015

The Circular Flow Model of economy By: Jodi Beggs

In this article, it explains that the Circular Flow Model is the one of the main basic models in Economics. Beggs also makes a good point, she says that if there are no factor markets, businesses would take all the profit and the households would take all the finished goods. Also, no factor markets mean no work or money for the Households and no labor for the Firms but Firms would still have more money in their pockets. Long story short, the cycle of the Circular Flow would end.

I chose article not just because it explains everything in detail but it also makes very good points that makes me sit and wonder “What if this happened in the economy?”

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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 model represents all of the actors in an economy as either households or firms (companies), and it divides markets into two categories:

Markets for goods and services

Markets for factors of production (factor markets)

Remember, a market is just a place where buyers and sellers come together to generate economic activity.

Goods and Services Markets

In goods and services markets, households buy finished products from firms that are looking to sell what they make. In this transaction, money flows from households to firms, and this is represented by the direction of the arrows on the lines labeled "$$$$" that are connected to the "Goods and Services Markets" box. Note that money, by definition, flows from buyer to seller in all markets.

On the other hand, finished products flow from firms to households in goods and services markets, and this is represented by the direction of the arrows on the "Finished product" lines. The fact that the arrows on the money lines and the arrows on the product lines go in opposite directions simply represents the fact that market participants always exchange money for other stuff.

Markets for the Factors of Production

If markets for goods and services were the only markets available, firms would eventually have all of the money in an economy, households would have all of the finished products, and economic activity would stop. Luckily, the goods and services markets don't tell the whole story, and factor markets serve to complete the circular flow of money and resources.

The term "factors of production" refers to anything that is used by a firm in order to make a final product. Some examples of factors of production are labor (the work was done by people), capital (the machines used to makes products), land, and so on. Labor markets are the most commonly discussed form of a factor market, but it's important to remember that factors of production can take many forms.

In factor markets, households and firms play different roles than they do in the markets for goods and services. When households provide (i.e. supply) labor to firms, they can be thought of as the sellers of their time or work product. (Technically, employees can more accurately be thought of as being rented rather than being sold, but this is usually an unnecessary distinction.) Therefore, the functions of households and firms are reversed in factor markets as compared to in goods and services markets. Households provide labor, capital, and other factors of production to firms, and this is represented by the direction of the arrows on the "Labor, capital, land, etc." lines on the diagram above.

In the other side of the exchange, firms provide money to households as compensation for the use of factors of production, and this is represented by the direction of the arrows on the "SSSS" lines that connect to the "Factor Markets" box.

The Two Types of Markets Form a Closed Loop

When factor markets are put together with goods and services markets, a closed loop for the flow of money is formed. As a result, continued economic activity is sustainable in the long run, since neither firms nor households are going to end up with all of the money.

The outer lines on the diagram (the lines labeled "Labor, capital, land, etc." and "Finished product") also form a closed loop, and this loop represents the fact that firms use factors of production to create finished products and households consume finished products in order to maintain their ability to provide factors of production.

Models Are Simplified Versions of Reality

This model is simplified in a number of ways, most notably in that it represents a purely capitalistic economy with no role for government. One could, however, extend this model to incorporate government intervention by inserting government between the households, firms, and markets.

It's interesting to note that there are four places where the government could be inserted into the model, and each point of intervention is realistic for some markets and not for others. (For example, an income tax could be represented by a government entity being inserted between households and factor markets, and a tax on a producer could be represented by inserting government between firms and goods and services markets.)

In general, the circular-flow model is useful because it informs the creation of the supply and demand model. When discussing the supply and demand for a good or service, it is appropriate for households to be on the demand side and firms to be on the supply side, but the opposite is true when modeling the supply and demand for labor or another factor of production.

Households Can Provide Things Other Than Labor

One common question regarding this model is what it means for households to provide capital and other non-labor factors of production to firms. In this case, it's important to remember that capital refers not only to physical machinery but also to the funds (sometimes called financial capital) that are used to buy the machinery used in production. These funds flow from households to firms every time people invest in companies via stocks, bonds, or other forms of investment. Households then get a return on their financial capital in the form of stock dividends, bond payments, and the like, just as households get a return on their labor in the form of wages.

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What is the Circular-Flow Model of the Economy?

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How does money move through the economy? Read about the circular-flow model including, the movement of money, goods and services, and factors of production.

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http://www.economicsdiscussion.net/circular-flow/the-circular-flow-of-economic-activity/18159

The Circular Flow of Economic Activity Shared on website By: Natasha Kwat

In this article, before the Circular Flow Model is fully explained, we have been given the terms and the roles of each groups. Households are the consumers and the those who get paid for land and labour. Firms are the producers and those who command if a product will be manufactured or distributed. Lastly the government plays an important role in the economy, since we live in a capitalist country does not intervene with manufacturing and trade but they will get in the way of the firm’s productivity unless they have product rights.

This article also explains the Circular Flow Model in three different economies: Two, Three, and Four-Sector economies.

Two-Sector Economy: Households and firms have an additional role, they exchange revenue, income of resources, expenditure of Firms, revenue of Firms, and Consumption of expenditure with one another.

Three-Sector Economy: Households pay taxes to the Government Sector while the Government Sector buys services from households. Firm Sectors also pay taxes to the Government Sector and the Government Sector purchase their needed goods from those Firm Sectors. Firm Sectors send income payments to households and the Households will make purchases from the Firm Sectors. Households and the Government Sector send their savings to the Capital Market while the Capital Market invests in the Firms and the Government Sectors.

Four-Sector Economy: Everything I explained about the Three-Sector Economy complies with the Four-Sector Economy but there are some new rules. Firms and Households will send their payment for import to the Foreign Sector while the Foreign Sends Exports Transfer payments to Firms and sends Transfer payments to Households. So, unlike Two/Three-Sector, Four-Sector Economies have a “Foreign Sector” for import/export payments

I wanted to add this to the wall because I am happy that the creator of the article gave us some important details throughout the entire thing! I didn’t even know there were different sectors of Economies

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The below mentioned article provides an overview on the Circular Flow of Economic Activity. After reading this article you will learn about: 1. Introduction to the Circular Flow of Economic Activity 2. The Circular Flow in a Two-Sector Economy 3. The Circular Flow in a Three-Sector Economy 4. The Circular Flow in a Four-Sector Economy.
Introduction to the Circular Flow of Economic Activity:

The all pervasive economic problem is that of scarcity which is solved by three institutions (or decision-making agents) of an economy. They are households (or individuals), firms and government. They are actively engaged in three economic activities of production, consumption and exchange of goods and services. These decision-makers act and react in such a manner that all economic activities move in a circular flow.

First, we discuss their nature and role in decision-making.

Households:

Households are consumers. They may be single-individuals or group of consumers taking a joint decision regarding consumption. They may also be families. Their ultimate aim is to satisfy the wants of their members with their limited budgets.

Households are the owners of factors of production-land, labour, capital and entrepreneurial ability. They sell the services of these factors and receive income in return in the form of rent, wages, and interest and profit respectively.

Firms:

The term firm is used interchangeably with the term producer in economics. The decision to manufacture goods and services is taken by a firm. For this purpose, it employs factors of production and makes payments to their owners. Just as household's consumer goods and services to satisfy their wants, similarly firms produce goods and services to make a profit.

The term 'firm' includes joint stock companies like DCM, TISCO etc., public enterprises like IOC, STC, etc., partnership concerns, cooperative societies, and even small and big trading shops which do not manufacture the commodities they sell.

Government:

The government plays a key role in all types of economic systems-capitalist, socialist and mixed. In a capitalist economy, the government does not interfere. It simply establishes and protects property rights. It sets standards for weights and measures, and the monetary system.

In a socialist economy, the role of the government is very extensive. It owns and regulates the entire production and consumption processes of the economy, and fixes prices of goods and services. In a mixed economy, the government strengthens the market system.

It removes its defects by regulating the activities of the private sector and by providing incentives to it. The government also uses resources to produce goods and services itself which are sold to households and firms. These decision-making agents take economic decisions to produce goods and services and to exchange them in order to consume them for satisfying the wants of the whole economy.

Production, consumption and exchange are the three main activities of the economy. Consumption and production are flows which operate simultaneously and are interrelated and interdependent. Production leads to consumption and consumption necessitates production.

In other words, production is a means (beginning) and consumption is the end of all economic activities. Both production and consumption, in turn, depend upon exchange. Thus these two flows are interrelated and interdependent through exchange.

The Circular Flow in a Two-Sector Economy:

In a simplified economy with only two types of economic agents, households or consumers and business firms, the circular flow of economic activity is shown in Figure 10. Consumers and firms are linked through the product market where goods and services are sold. They are also linked through the factor market where the factors of production are sold and bought.

Consumers and firms have a dual role, and exchange with one another in two distinct ways:

(1) Consumers or households own all the factors of production, that is, land, labour, capital and entrepreneurship, which are also called productive resources. They sell them to firms for producing goods and services.

In the diagram, the sale of goods and services by firms to consumers in the product market is shown in the lower portion of the inner circle from left to right; and the sale of their services to firms by households or consumers in the factor market is shown in the upper portion of the inner circle from right to left. These are the real flows of goods and services from firms to consumers which are linked with productive resources from consumers to firms through the medium of exchange or barter.

(2) In a modem economy, exchange takes place through financial flows which move in the reverse direction to the "real" flows. The purchase of goods and services in the product market by consumers is their consumption expenditure which becomes the revenue of the firms and is shown in the outer circle of the lower portion from right to left in the diagram.

The expenditure of firms in buying productive resources in the factor market from the consumers becomes the incomes of households, which is shown in the outer circle of the upper portion from left to right in the diagram.

The Circular Flow in a Three-Sector Economy:

So far we have been working on the circular flow of a two-sector model of an economy. To this we add the government sector so as to make it a three-sector closed model of circular flow of economic activity. For this, we add taxes and government purchases (or expenditure) in our presentation.

Taxes are outflows from the circular flow and government purchases are inflows into the circular flow. The circular flow in a three-sector economy is illustrated in Figure 11.

First, take the circular flow between the household sector and the government sector. Taxes in the form of personal income tax and commodity taxes paid by the household sector are outflows (or leakages) from the circular flow. But the government purchases the services of the households, makes transfer payments in the form of old age pensions, unemployment relief, sickness benefit, etc., and also spends on them to provide certain social services like education, health, housing, water, parks and other facilities.

All such expenditures by the government are inflows (injections) into the circular flow. Next take the circular flow between the business sector and the government sector. All types of taxes paid by the business sector to the government are leakages from the circular flow.

On the other hand, the government purchases all its requirements of goods of all types from the business sector, gives subsidies and makes transfer payments to firms in order to encourage their production. These government expenditures are injections into the circular flow.

Now we take the household, business and government sectors together to show their inflows and outflows in the circular flow. As already noted, taxes are a leakage from the circular flow. They tend to reduce consumption and saving of the household sector. Reduced consumption, in turn, reduces the sales and incomes of the firms.

On the other hand, taxes on business firms tend to reduce their investment and production. The government offsets these leakages by making purchases from the business sector and buying services of the household sector equal to the amount of taxes. Thus inflows (injections) equal outflows (leakages) in the circular flow.

Figure 11 shows that taxes flow out of the household and business sectors and go to the government. The government purchases goods from firms and also factors of production from households. Thus government purchases of goods and services are an injection in the circular flow and taxes are leakages in the circular flow.

If government purchase exceeds net taxes then the government will incur a deficit equal to the difference between the two, i.e., government expenditure and taxes. The government finances its deficit by borrowing from the capital market which receives funds from the household sector in the form of saving.

On the other hand, if net taxes exceed government purchases the government will have a budget surplus. In this case, the government reduces the public debt and supplies funds to the capital market which are received by the business sector.

The Circular Flow in a Four-Sector Economy:

So far the circular flow has been shown in the case of a closed economy. But the actual economy is an open one where foreign trade plays an important role. Exports are an injection or inflows into the circular flow of money. On the other hand, imports are leakages from the circular flow.

They are expenditure s incurred by the household sector to purchase goods from foreign countries. These exports and imports in the circular flow are shown in Figure 12.

Take the inflows and outflows of the household, business and government sectors in relation to the foreign sector. The household sector buys goods imported from abroad and makes payment for them which is a leakage from the circular flow of money. The householders' ma receives transfer payments from the foreign sector for the services rendered by them in foreign countries.

On the other hand, the business sector exports goods to foreign countries and its receipts are an injection in the circular flow or money. Similarly, there are many services rendered by business firms to foreign countries such as shipping, insurance, banking, etc. for which they receive payments from abroad.

They also receive royalties, interests, dividends, profits, etc. for investments made in foreign countries. On the other hand, the business sector makes payments to the foreign sector for imports о capital goods, machinery, raw materials, consumer goods, and services from abroad. These are the leakages from the circular flow of money.

Like the business sector, modern governments also export and import goods and services, and lend to and borrow from foreign countries. For all exports of goods, the government receives payments from abroad.

Similarly, the government receives payments from foreigners when they visit the country as tourists and for receiving education, etc., and also when the government provides shipping, insurance and banking services to foreigners through the state-owned agencies.

It also receives royalties, interests, dividends, etc. for investments made abroad. These are injections into the circular flow of money. On the other hand, the leakages are payments made to foreigners for the purchase of goods and services.

Figure 12 shows the circular flow of money of the four sector open economy with saving, taxes and imports shown as leakages from the circular flow on the right hand side of figure, and investment, government purchases and exports as injections into the circular flow, on the left side of the figure.

Further, imports, exports and transfer payments have been shown to arise from the three domestic sectors-the household, the business and the government. These outflows and inflows ass through the foreign sector which is also called the "Balance of Payments Sectors".

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ADVERTISEMENTS: The below mentioned article provides an overview on the Circular Flow of Economic Activity. After reading this article you will learn about: 1. Introduction to the Circular Flow of Economic Activity 2. The Circular Flow in a Two-Sector Economy 3. The Circular Flow in a Three-Sector Economy 4.

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https://www.masterclass.com/articles/understanding-the-circular-flow-model-in-economics

This article gives a detailed explanation of how the circular flow model works. It shows how the model works in both directions. Both money flowing from the household to business by buying goods, and from the business to the household by providing labour to the business to produce goods. It also shows what isn’t included in the circular flow model that also impact the economy, like foreign imports and exports and how they leak goods into and out of the economy.

I chose this article because it gives a simple and easy to understand of the circular flow model, and shows each side of the model relies on the other.

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https://www.tutor2u.net/economics/reference/circular-flow-of-income-and-spending

This article focuses on the use of the circular flow model more on the personal level, showing the impacts income and spending have on the economy. You get income from working at a business, which gives you wealth to spend on goods from businesses, continuing the cycle.. It also shows the leakages from the circular flow, such as savings, taxation and imports. As well as injections into the circular flow model like investments, government expenditure and exports.  Also, it introduces the government’s role in a circular flow model, showing how both the household businesses pay taxes to the government, which provides social benefits and loans to start new businesses.

I chose this article because it shows the circular flow model on a more personal level, showing how it relates to your personal spending and income, as well as the impact saving money for future use has. It also provides very detailed and informative graphics which make understanding the complexities of the circular flow model easy to understand.

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It shows flows of goods and services and factors of production between firms and households

The circular flow shows how national income or Gross Domestic Product is calculated

Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production (land, labour, capital and enterprise) - for example wages and salaries going to people in work.
Leakages (withdrawals) from the circular flow
Not all income will flow from households to businesses directly. The circular flow shows that some part of household income will be:

1.Put aside for future spending, i.e. savings (S) in banks accounts and other types of deposit

2.Paid to the government in taxation (T) e.g. income tax and national insurance

3.Spent on foreign-made goods and services, i.e. imports (M) which flow into the economy

Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output)

Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.

1. Capital spending by firms, i.e. investment expenditure (I) e.g. on new technology

2. The government, i.e. government expenditure (G) e.g. on the NHS or defence

3. Overseas consumers buying UK goods and service, i.e. UK export expenditure (X)

An economy is in equilibrium when the rate of injections = the rate of withdrawals from the circular flow.

Building up the model
In this next series of images we build up the circular flow model from just having a domestic sector and then adding in an external sector (exports and imports) before including the financial sector which channels savings and hopefully provides the finance available to fund investment.
The Domestic Circular Flow of Income and Spending
The external sector involves businesses exporting goods and services overseas (X) and consumers and business buying imported products from other countries (M)

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Understanding the Circular Flow of Income and Spending | Economics | tutor2u

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It shows flows of goods and services and factors of production between firms and households The circular flow shows how national income or Gross Domestic Product is calculated Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production (land, labour, capital and enterprise) - for example wages and salaries going to people in work.

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https://www.youtube.com/watch?v=_PKH2wtDT3E&t=39s

The Circular Flow Model of a Market Economy By: Jason Welker

In the first video, Jason Welker talks in length about the what every group in the Circular Flow Model does for the other and what they get rewarded for. He also explains the goals of households and firms: Households want maximum utility, happiness, and consumption of goods and services while businesses want to maximize profits and sell goods and services to make more revenue than what spent on resources to develop/manufacture quality goods.

I have chosen this video for this wall because Jason Welker explains crucial details about the circular flow model (as I explained some of those details) in a professional matter.

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The Circular Flow Model of a Market Economy

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https://www.youtube.com/watch?v=mN5HPJYJzus&t=117s

Circular Flow Matrix- How the economy works By: Jacob Clifford

In this video, Jacob Clifford (the creator of the video) says similar things Jason Welker has written but he mentions some details that I never knew before until now. He explains that Businesses both supply and demand, they demand in the Resource Market and they supply the Product Markets. Clifford also gave an example (in the form of a question); a mall is both a Product Market and a Resource Market because people come to buy stuff from the product market side while people also work there for the resource market side so money is both being earned and spent.

This video has some very interesting details on the Circular Flow Model with questions that are useful for knowing the extra details of what the circular flow model is all about.

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Circular Flow Matrix- How the economy works

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https://www.youtube.com/watch?v=Hfz1bwK5C4o

This video demonstrates how the circular flow model would work with a single individual, and how it would expand with a larger population. It also breaks down every step of the circular flow model, showing were the firm gets its income and where its expenditure goes, and the same for the household, and how it all balances out. The video also explains the circular flow model ties in with calculating the Gross Domestic Product, by using both expenditure and income from the circular flow model.

I chose this video because it provides a much more in depth look at the circular flow model, and breaks down every stage to an easy to understand level.

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Circular flow of income and expenditures | Macroeconomics | Khan Academy

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https://www.youtube.com/watch?v=SVAa1jX8P6c

This video provides a very basic, and simple understanding of the circular flow model thats easy to follow and understand. It does this by breaking the circular flow model of the free market into four stages, household, product market, firms/businesses, and the factor market. It also focuses more on the relationship between each stage of the model, rather than each step as being different.

I chose this video because I think it would be a great example to show someone the circular flow  model for the first time. I think it would be good at this because it shows the relationship between each stage of the model, how each direction relies on the other without getting too in detail and stays under five minutes long.

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Clarkenomics: High School Econ: Market Economy Circular Flow Model

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1. We learned that there is more to the Circular Flow Model than we thought there was. We didn't know that there are different types of the Circular Flow model like the representations of the Two, Three and Four-sector Economies. We also learned that if we take out one of the markets from the Circular Flow Model, there is a chance that the cycle that it rotates in will end and the Firms will stop earning money and Households won't get the goods they need.

2. Apple has a manufacturing factory in California. Apple pays taxes to keep the factory running. the factory needs more workers to run it. Apple's factory will pay those who will apply and work part or full time. Employed workers will then help manufacture goods for apple. After quality approval, Walmart, Best Buy, The Source, etc will then buy those finished devices to sell at their stores. Consumers will come in to buy a new IPhone 11 from any store that sells Apple products. The consumer gets his new phone. Consumers, the Markets, and Apple are happy.

3. The most important thing for friends and family to know about the Circular Flow Model is that it's a very complex cycle that needs help from each other in order to keep moving, They can't live without each other.

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https://wiki.ubc.ca/The_Circular_Flow_Diagram

This is an in-depth look at the Circular Flow Model. It shows a cycle that loops infinitely. It shows that we buy products from the Product Market. The factor market pay us for work, land, etc. Businesses/Firms pay the Factor Market for factors of production. And lastly the Product Market pays businesses for their goods and products. After these four actions, the cycle rinses and repeats.

I have chosen this photo of the Circular Flow Model because it represents what it is very well and it is easier to understand than many.

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In economics, the circular flow diagram represents the organization of an economy in a simple economic model. This diagram contains, households, firms, markets for factors of production, and markets for goods and services.

The flow of inputs and outputs

Households provide the factors of production (labour, land, and capital) to the firms through the markets for factors of production. The firms will then use these factors of production to produce goods and services to be sold in the markets for goods and services. The households will then buy these goods and services from the firms through the market for goods and services.

The flow of dollars

Firms pay wages, rent, and profit to the households for their supply of the factors of production in the market for factors of production. Households will use these income to spend on goods and services supplied by the firms in the market for goods and services. When households spend money on these goods and services, firms will earn a revenue which can then be reinvested to obtain more factors of production.

NOTE: The capital that is mentioned as a factor of production is not money. Instead, it is machines and equipments that are needed in the production process.

Back to EconHelp

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In economics, the circular flow diagram represents the organization of an economy in a simple economic model. This diagram contains, households, firms, markets for factors of production, and markets for goods and services. The flow of inputs and outputs Households provide the factors of production (labour, land, and capital) to the firms through the markets for factors of production.

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https://www.tutor2u.net/economics/reference/circular-flow-of-income-and-spending

This diagram gives a clear understanding of how the circular flow model works with the wealth flowing through household, government and firms, and how the model remains a cycle. It shows the different stages, and their relationship with the other stages. It simply shows how the household supports firms by purchasing goods, and the firms pay the household for labor, but also how both the household and firms pay taxes to the government which then redistributes the wealth into social benefits and government loans.

I chose this picture because its a very clear diagram of how the circular flow model works, and how each stage interacts with each other.

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It shows flows of goods and services and factors of production between firms and households

The circular flow shows how national income or Gross Domestic Product is calculated

Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production (land, labour, capital and enterprise) - for example wages and salaries going to people in work.
Leakages (withdrawals) from the circular flow
Not all income will flow from households to businesses directly. The circular flow shows that some part of household income will be:

1.Put aside for future spending, i.e. savings (S) in banks accounts and other types of deposit

2.Paid to the government in taxation (T) e.g. income tax and national insurance

3.Spent on foreign-made goods and services, i.e. imports (M) which flow into the economy

Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output)

Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.

1. Capital spending by firms, i.e. investment expenditure (I) e.g. on new technology

2. The government, i.e. government expenditure (G) e.g. on the NHS or defence

3. Overseas consumers buying UK goods and service, i.e. UK export expenditure (X)

An economy is in equilibrium when the rate of injections = the rate of withdrawals from the circular flow.

Building up the model
In this next series of images we build up the circular flow model from just having a domestic sector and then adding in an external sector (exports and imports) before including the financial sector which channels savings and hopefully provides the finance available to fund investment.
The Domestic Circular Flow of Income and Spending
The external sector involves businesses exporting goods and services overseas (X) and consumers and business buying imported products from other countries (M)

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Understanding the Circular Flow of Income and Spending | Economics | tutor2u

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It shows flows of goods and services and factors of production between firms and households The circular flow shows how national income or Gross Domestic Product is calculated Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production (land, labour, capital and enterprise) - for example wages and salaries going to people in work.