Circular flow of income in three sector economy

Introduction

Have you ever wondered how our economy works? How do millions of people and businesses in an economy interact with and influence one another?

If so, you are not alone. Understanding the workings of the whole economy is not challenging.

Circular flow model example

The economists have developed a model to visually understand the workings of the whole economy in a simplified way. This model is called the circular flow of national income and is an important topic in macroeconomics. In this article, we will explain this model with diagrams.

Circular Flow of Income

The circular flow of income is a model that shows the way factors of production, goods and services, and money circulate in an economy.

It is a continuous or circular loop of the flow of inputs, outputs, and money in an economy.

Assumptions

The circular flow of national income has the following assumptions:

- Households own all the factors of production.

- Savings are done in banks.

- There is only a direct tax.

- All of the firms’ output is sold.

Circular Flow Diagram

A visual presentatio

what is the purpose of the circular flow model in economics

what does circular flow model mean in economics