Circular flow of income

Households

Income, consumption

Income

Households receive income in form of wages, rent, interest, profit

Consumption

They spend this income on goods and services produced by firms

Firms

Production, revenue

Production

Firms produce goods and services using factors of production provided by households

Revenue

They earn revenue from selling these goods and services to households and other firms

Leakages

Tax, savings, imports

Tax

Part of income earned by households is paid to government as taxes

Savings

Households save a portion of their income in financial institutions

Imports

Households and firms spend part of their income on imported goods and services

Injections

Government expenditure, investments, exports

Government expenditure

Government spends money on public goods and services which inject income back into economy

Investment

Firms sell goods and services to foreign markets, bringing income into economy

Financial sector

Savings and investment

Saving and investment

Financial sector channels savings from households to firms for investment

Government sector

Taxes and expenditure

Taxes and expenditures

Government collects taxes from households and firms and spends on public services and infrastructure

Foreign sector

Imports and exports

Imports and exports

Foreign sector involves trade with other countries, where imports are leakages and exports are injections

Investment

Firms invest in capital goods funded by savings from households