CIRCULAR FLOW DIAGRAM

Circular Flow Diagram

Summarizes transactions between the different economic agents.
Households, firms, government and world

households

Circular Flow Diagram assumes that the economy is composed of ______ which own the factors of production and consume goods and services and firms

Upper loop

firms>households

Lower loop

households>firms

Government purchases of goods and services

Government payments for factors services

Transfer payments between different agents

Firms and households pay taxes to government

Transaction with the foreign sector

Exports

sales of domestically produced goods to other countries

Exports

Payment from the rest of the world

Imports

goods brought from other countries

Imports

Payment by the purchasing domestic agent to the world