The Circular-Flow Model

By Jodi Beggs, About.com Guide

One common question regarding this model is what it means for households to provide capital and other non-labor factors of production to firms. In this case, it’s important to remember that capital refers not only to physical machinery but also to the funds (sometimes called financial capital) that are used to buy the machinery used in production. These funds flow from households to firms every time people invest in companies via stocks, bonds, or other forms of investment. Households then get a return on their financial capital in the form of stock dividends, bond payments, and the like, just as households get a return on their labor in the form of wages.

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• 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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