The Circular Flow Model AQA 3.2.2.1 The Four Key Parts of the Circular Flow Model Households Households receive income through wages and salaries from their jobs and investments and they then buy goods and services supplied by firms (consumer spending) Businesses Businesses hire land, labour & capital inputs when making products for which they pay wages and rent. Firms receive payment from consumers (creaEng revenues and profits) Government External Sector Government collects taxes (T) to fund spending on public services e.g. educaEon, healthcare and defence and welfare assistance. State spending is labelled as G The UK buys imports from other countries, (M) and overseas businesses and consumers buy UK products – known as exports (X) The Basic Circular Flow Model Purchases of goods and services £ Households Demand Government Firms The Basic Circular Flow Model Purchases of goods and services £ Households Demand Government Incomes Firms £ Wages, dividends, interest, profits and rent The Basic Circular Flow Model Purchases of goods and services £ Taxes Households Incomes Demand Government Social Transfers Wages, dividends, interest, profits and rent Firms £ DomesDc Circular Flow of Income & Spending Purchases of goods and services £ Taxes Households Incomes Govt Purchases Government Social Transfers Demand Firms Taxes Wages, dividends, interest, profits and rent £ Circular Flow with an External Sector The External Trade Sector of the Economy Imports Exports Rest of the World Purchases of goods and services The DomesEc Circular Flow Households Government Firms £ Taxes Households Incomes Govt Purchases Government Social Transfers Demand Firms Taxes Wages, dividends, interest, profits and rent £ InjecDons & Leakages within the Circular Flow InjecEons Leakages Investment Saving Exports of goods and services Imports of goods and services Government spending TaxaEon There are three types of injecEon of extra spending into the circular flow model. There are three types of leakage or withdrawal from the circular flow. The Circular Flow Model AQA 3.2.2.1