Circular Flow

CIRCULAR FLOW

• Firms supply factors of production to households, and households pay for these factors.

• Shows the exchange of money, products, and resources between businesses, households and government

• Households supply goods and services to firms, and firms pay wages, rent, interest, and profit to households.

• Firms pay taxes to households, and households provide public goods to firms.

Factor Prices

• The payment households receive for goods and services they purchase from firms.

• The taxes that firms pay to the government.

• These terms can be used interchangeably and refer to cost of or price paid for the factors of production used by firms.

• The cost firms incur when selling their final products to households.

goods

• Resources like labor, capital, and natural resources that are used in the production process.

• Payments made by firms to households for the use of their factors of production.

• Tangible and intangible outputs of production that are sold by firms to households (and potentially other sectors).

• The total income earned by households from supplying factors of production to firms.

Foreign Sector

• It represents the savings and lending activities within the domestic economy.

• It encompasses the government's role in taxation and public spending.

• It includes all economic interactions a country has with the rest of the world, such as imports and exports.

• It focuses on the production of goods and services by domestic firms

Exports

• Goods and services purchased by domestic households from firms in other countries.

• Payments made by domestic firms to foreign households for factors of production.

• Goods and services produced by domestic firms and sold to households, firms, or governments in other countries.

• The flow of financial capital out of the domestic economy to foreign investments.

open economy

• An economy where the government plays no role in economic activity.

• An economy that trades with the foreign sector

• An economy where savings are always equal to investment.

• An economy that only includes households and firms interacting in the product and factor markets.

Taxes

• Payments made by firms to households for the factors of production they supply.

• Expenditures made by households to purchase goods and services from firms.

• The value of goods and services exported to other countries.

• Compulsory payments made by private individuals or business enterprises to the government sector with no direct benefit.