Circular flow

Circular flow

2-sector ecomy model

1. sector – firms – producers of goods and services
2. sector - households – buyers of goods and services

Households demand goods and services and firms supply them.In a money economy firms exchange goods and services for money – money flows from households to firms in forms of sustomers expenditures, while goods flow in opposite direction – this happends in product market.

Socond firms and households come together in the resource market. Firms demand for production factors is satysfied by households. Labour and other production factors flow from households to firms, in exchange firms pay households money in form of wages, sallaries, rent, dividends and intrests

Therefor there is circulation of money, goods and services. This model is very simplyfied, it does not count with either hoshold's savings or governmental expenditures incomes or export.