Circular Flow of Economic Activity
Circular Flow Concepts
• Product Market: where goods & services are exchanged
• Households: suppliers of the factors of production; demanders
of goods & services
• Government: providers of public goods & services; demanders
of both private goods & services & the factors of production
• Businesses/Firms: suppliers of goods & services; demanders
of the factors of production
• Factor Market: where the factors of production are exchanged
Product Market
 Public Goods
$ Taxes $ 
Factors of Production 
Households  $ Factor Payments $
 Goods & Services
$ Government Spending $ 
Government
Factor Market
Public Goods 
 $ Taxes $
Businesses/Firms
Goods & Services
$ Spending $
$
$
$
$
Households
Firms
$
$
$
$ Factor Payments $
Factors of Production
Goods & Services
$ Spending $
$
$
$
$
Public Goods
Households
$
Public Goods
$ Transfers/Taxes $
$ Taxes/Transfers $
$
$
$
$
$ Factor Payments $
Factors of Production
Firms
Goods & Services
Foreign
Sector
Foreign
Sector
$ Spending $
$
$
$
$
$
$
Public Goods
Households
$
Public Goods
$ Transfers/Taxes $
Firms
$ Taxes/Transfers $
$
$
$
Foreign
Sector
$
$
$ Factor Payments $
Factors of Production
$
Foreign
Sector
Goods & Services
Foreign
Sector
Financial
Firm
$
Foreign
Sector
$ Spending $
$
$
$
Public Goods
Households
$
Public Goods
$ Transfers/Taxes $
Firms
$ Taxes/Transfers $
$
$
Financial
Firm
$
Foreign
Sector
$ Factor Payments $
Factors of Production
$
Foreign
Sector
Goods & Services
Foreign
Sector
Financial
Firm
$
Foreign
Sector
$ Spending $
$
$
$
Public Goods
Households
$
Public Goods
$ Transfers/Taxes $
Firms
$ Taxes/Transfers $
$
$
$
$
$
$
$
$
Foreign
Sector
$ Savings $
Financial Assets
Financial
Firm
$
Foreign
Sector