The Circular-Flow Model

By Jodi Beggs, About.com Guide

One of the main basic economic models is the circular-flow model, which describes the flow of money and products throughout the economy in a very simplified way. The model represents all of the actors in an economy as either households or firms (companies), and it divides markets into two categories:

• markets for goods and services
• markets for factors of production (factor markets)

(Remember, a market is just a place where buyers and sellers come together to generate economic activity.) The model is illustrated by the diagram above.

Previous

• The Circular-Flow Model
• Goods and Services Markets
• Markets for the Factors of Production
• The Two Types of Markets Form a Closed Loop
• Models Are Simplified Versions of Reality
• Households Can Provide Things Other Than Labor

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