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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 the circular flow of money?

  • Like the other sectors, each flow of money is paired with a flow of a factor of production or goods and services. The fifth sector 鈥?the financial sector 鈥?is added to complete the circular flow model.

  • What is the role of business in circular flow?

  • Businesses are the producers of goods and services in the circular flow model. They purchase resources in the factor market and sell goods and services in the product market. The monetary payments in the product market are generally called sales. The money flow includes all payments within the circular flow model.

  • What is the circular flow of income model?

  • Key Takeaways. 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.

  • 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.