The Circular Flow of Money
Learning Objective
I can illustrate how money, goods, and services move between households and firms in a circular flow model.
Key Concepts
In a two-sector economy, if consumers save money in a bank, this is considered a leakage from the circular flow, while firms borrowing money from a bank is considered an injection.
In a three-sector economy, taxation is an additional leakage because it reduces spending between households and firms, while government spending is an injection because it increases spending.
In a four-sector open economy, the three leakages are savings, taxation, and import expenditure, while the three injections are investment, government expenditure, and export revenue.
Practice Questions
This lesson includes 12 practice questions to reinforce learning.
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1. List the four factors of production and their corresponding financial rewards.
2. What is the primary difference between product markets and resource (factor) markets?
3. Explain the difference between an open and a closed economy in the context of the circular flow model.
...and 9 more questions
Educational Video
The circular flow of income
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