The Circular Flow Model aims to show how different sectors in the economy interact.
- Households ⇒ Labor ⇒ Resource / Factor Market
- Households ← Wages / Salaries → Resource / Factor Market
Households provide labor to the resource market and in exchange, they are paid a salary.
- Resource / Factor Market → Labor → Firms / Business
- Resource / Factor Market ← Spending ← Firms / Business
The labor that households provide the resource market is employed by companies to produce goods and services. They then spend on paying wages for the labor they receive.
- Firms / Business → Products → Product Market
- Firms / Business ← Revenue ← Product Market
The firms will then sell the goods and services produced to the product market where they will earn a revenue for selling them.
- Product Market → Products → Households
- Product Market ← Income ← Households
Households will go to the product market to buy goods and services. They will then use the income they earned from the companies to buy these goods and services.
In conclusion, the economy interacts in such a way that every sector is connected.
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