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In the basic (two-factor) circularflowmodel, money flows from households to businesses as consumer expenditures in exchange for goods and services produced by the businesses, then flows back from businesses to households for the labor that individuals provide.

People also ask


  • What is circular flow of income?

  • Circular flow of income is a model of income going from firm to household and vice versa in a loop. The model can be much more complex including things such as leakages and additions to income from other sectors of the economy.

  • How does the flow of money move in a circular manner?

  • The money it receives by selling goods and services to the household sector is fully spent in making payments as rent, wages, interest and profits to the household sector. It is these assumptions that keep the flow of money to move in a circular manner in the economy.

  • What is the basic purpose of circular flow model?

  • The basic purpose of the circular flow model is to understand how money moves within an economy. It breaks the economy down into two primary players: households and corporations. It separates the markets that these participants operate in as markets for goods and services and the markets for the factors of production .

  • What is the difference between saving and investment in circular flow?

  • In the circular flow of money, saving is one of the leakages and investment is an injection. In fact, the household and business sectors do not spend their entire money income.