Circular Flow of Goods And Income
There are two sectors in the circular flow of goods & services. One is a household sector and the other is the business sector, which includes firms. Households demands goods & services, firms supply goods & services. An exchange takes place in an economy.
In a monetary economy, firms exchange goods & services for money. Firms’ demands factors of production and households supply factors of production. Firms pay the payment in terms of wages, rent, etc. This is a circular flow of goods. On the other hand, household gives money to firms to purchase the goods & services from firms, and firms’ gives money to households in return for factors of production.
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