Question

Show the 'Circular flow of income' with diagram.

Hint:

In a simple circular flow model, income moves from firms to households and then back to firms in the form of consumption expenditure.

Answer 1

The circular flow of income refers to the movement of money between different sectors of the economy. It demonstrates how money flows through the economy in two main loops: between firms and households, and between businesses and the government. \[\begin{array}{rl} \bullet & \text{Households: Households provide factors of production (land, labor, capital) to firms in exchange for income (wages, rent, interest).} \\ \bullet & \text{Firms: Firms produce goods and services and sell them to households in exchange for revenue.} \\ \bullet & \text{Government: The government collects taxes from households and firms and redistributes it in the form of subsidies, public services, or transfers.} \\ \bullet & \text{Foreign Sector: The foreign sector involves imports and exports, affecting the domestic economy's income flow.} \\ \end{array}\]