9708 · 4.2
Introduction to the circular flow of income
The **circular flow** (4.2) is the foundation for **AD–AS** (4.3) and **fiscal policy** (5.2). Label **all four sectors** (households, firms, government, foreign) on diagrams and explain why **J = W** at equilibrium.
Need to know
What you need to know
- Households supply factors of production and receive factor incomes.
- Firms produce goods and services and receive revenue from their sale.
- Real flows are the movement of goods, services, and factors of production.
- Money flows are the payments for these, such as wages and consumer spending.
- In the basic model, National Income = National Output = National Expenditure.
Explanation
Introduction to the circular flow of income
- Households supply factors of production and receive factor incomes.
- Firms produce goods and services and receive revenue from their sale.
- Real flows are the movement of goods, services, and factors of production.
- Money flows are the payments for these, such as wages and consumer spending.