The Circular-Flow Model

By Jodi Beggs, About.com Guide

In goods and services markets, households buy finished products from firms that are looking to sell what they make. In this transaction, money flows from households to firms, and this is represented by the direction of the arrows on the lines labeled “$$$$” that are connected to the “Goods and Services Markets” box. (Note that money, by definition, flows from buyer to seller in all markets.)

On the other hand, finished products flow from firms to households in goods and services markets, and this is represented by the direction of the arrows on the “Finished product” lines. The fact that the arrows on the money lines and the arrows on the product lines go in opposite directions simply represents the fact that market participants always exchange money for other stuff.

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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