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Circular Flow Infographic

In the circular flow model: - Firms are sellers of goods and services (supply) and households are buyers (demand) in the product market. Households are sellers of labor, capital, land, and entrepreneurship (supply) and firms are buyers (demand) in the resource market. - Government participates as a buyer in both the product and resource markets. It provides public goods, services, and transfer payments to households and firms in exchange for tax payments. - The circular flow shows how money flows between households, firms, and the government through spending on goods, services, labor and factors of production. It can be used to measure the economy through calculations like GDP.

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Maria Constancia
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208 views1 page

Circular Flow Infographic

In the circular flow model: - Firms are sellers of goods and services (supply) and households are buyers (demand) in the product market. Households are sellers of labor, capital, land, and entrepreneurship (supply) and firms are buyers (demand) in the resource market. - Government participates as a buyer in both the product and resource markets. It provides public goods, services, and transfer payments to households and firms in exchange for tax payments. - The circular flow shows how money flows between households, firms, and the government through spending on goods, services, labor and factors of production. It can be used to measure the economy through calculations like GDP.

Uploaded by

Maria Constancia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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THE FEDERAL RESERVE BANK OF ATLANTA

Circular Flow
What roles do households, firms, and government play in markets?
MICROECONOMICS

The Circular Flow Model


In the PRODUCT MARKET, firms are the sellers (supply) and households are the buyers (demand).

Goods and Services Goods and Services


Spending Revenue

PRODUCT MARKET
HOUSEHOLDS FIRMS
RESOURCE MARKET
Income Wages, Interest, Rent, Profit

Factors of Production Labor, Capital, Land, Entrepreneurship

In the RESOURCE MARKET, households are the sellers (supply) and firms are the buyers (demand).

Resource Market Product Market


Factors of Production Goods and Services
Land Goods
Land includes all production inputs Goods are items we buy that are tangible.
provided by nature (natural resources). Soccer balls and cell phones are tangibles.

Labor
Labor is the work of employees
possessing human capital.

Services
Capital Services are intangible and usually
Capital includes all human-made involve paying a firm to do something
goods used in the production of other for you.
goods and services.
Attending a soccer match and having
cell phone service are intangibles.
Entrepreneurship SHOP

Entrepreneurs take risks and


organize the factors of production
to start a business.

Government in the Circular Flow


In a three-sector circular flow diagram, government is a buyer (demand) in both the product and
resource markets. Government provides public goods, public services, and transfer payments to
households and firms in exchange for tax payments.
Resources Goods and Services
HOUSEHOLDS Income
GOVERNMENT Revenue
FIRMS
Public Goods and Services Public Goods and Services

Tax Payments Tax Payments

Transfer Payments Subsidies

Money Flows Flows to and from Government


Wages/Salaries Taxes
Payments to households (income)
Payment to government in exchange
in the resource market for selling
for public goods and services
labor

Interest
Payments to households (income)
in the resource market for lending Transfer Payments
money for capital purchases Payments, excluded from GDP, from
government to households without a
reciprocal exchange of resources
Rent
Payments to households (income)
in the resource market for the use
of land Public Goods
and Services
Goods and services like bridges and
Profit schools financed by tax dollars on
SHOP

Payments to households (income) in behalf of society


the resource market to entrepreneurs
whose business revenue exceeds costs

Subsidies
Revenue
Payments, excluded from GDP,
Money received by firms in the from government to firms without
product market in exchange for a reciprocal exchange of goods
goods and services or services

Measuring the Economy Using the Circular Flow


Product Gross
Market Domestic
Calculation Product
C
Personal
Consumption
I
Private
Investment
G NX
Government
Expenditures
Net
Exports

Resource National
Market Income
Calculation Accounting
W I
Wages Interest
R P
Rents Profits

Learn more about this topic and download a copy of this infographic by
Connect with the Atlanta Fed. visiting frbatlanta.org/education/classroom-tools/infographics

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