The Circular Flow of Goods, Services and Money

(Script)

INTRO:
Have you ever wonder how the goods and services in the market is moving? Ever
thought how money interact within the sectors of the economy? Worry no
more because here we are to raise awareness about these aspects happening in our economy. Welcome to this 3-
minute private session about The Circular Flow of goods, services, and money in the market.

CONTENT:
Before going through, let us first define what is The Circular Flow of Economic Activity?
The Circular flow of Economic Activity is a model showing the basic economic relationship within
a market economy.

It somehow illustrates the balance between the income received (injection) and the payments (leakage) by each
sector/group.

Leakage refers to capital or income that exits an economy or system rather than remaining within it. Injection
means introduction of income into the flow.

Let us walk through this Circular Flow step by step.

Let us remember that in the economy, everything seems to affect everything else. One action of something seems
to have a domino effect to others.

To understand it more clearly, the sectors in the economy is divided into 4 broad groups; the households, the
firms, the government as the Domestic Sector and the rest of the world as the External Trade Sector.

All of them interacts to each other in a different manner.

Let’s first identify the 4 factors of production

Land which is paid by rent,

Labor which is paid by wages/salary,
Capital which is paid by interest, and
Entrepreneurship which is paid by profit.

Let’s go on to the Circular Flow Diagram

Households works and invests on firms, because of that they receive wages for their work, interest on corporate
bonds and dividends for their investments. They also work
and invest on the government, and receive wages and interests on government bonds. Many households also
receive transfer payments from the government. Transfer payments - In
economics, a transfer payment is a redistribution of income and wealth by means of the government making a
payment, without goods or services being received in return. For example, Social Security benefits,
veterans’ benefits, and welfare payments. Together, these receipts make up the total
income received (injections) by the households.

Households buy goods and services from firms and pay taxes to the government. These
items make up the total amount paid out (leakage) by the households.
The difference between the total receipts (Injections) and the total payments (leakage) of the households is the
amount that the households save or dissave.

If households receive more than they spend, they save during the period.
If they receive less than they spend, they dissave.

Firms sell goods and services to households and the government to earn revenue or profit, which shows up in the
circular flow diagram as a flow into the firm sector. Firms pay wages,
interest, and dividends to households, and firms pay taxes to the government. These payments are
shown flowing out of firms.

The government collects taxes from households and firms. The

government also makes payments. It buys
goods and services from firms, pays wages and interest to households, and makes transfer payments to
households. If the
government’s revenue is less than its payments, the government is dissaving.

Finally, households spend some of their income on imports—goods and services produced in the rest of the world.
Similarly, people in foreign countries purchase exports—goods and services produced by domestic firms and sold
to other countries.

Households provide their labor, land, capital and other human skills to the resource market and in return, they get
money income (rent, wage, interest, profit etc) from the resource market. Households provide goods
and services to the product market and in return participants of product, market collect consumption expenditures
of the households.

Government sector stay middle in the circular flow of goods and service process, here government collect net
taxes (sells and income) from both business and households. As a responsible government provides required goods
and services to the business and households. The government also collect resources from the resource market and
goods and services from the product markets for this government have to incur expenditures which are got by the
resource market participants.

Businesses incur costs to collect resources from the factor market (resource markets). So resource markets get
money from the businesses and in return resource market supply required resources to the business. These
resources are used to produce goods and services to deliver to the economy. On the other
hand, a business sells its goods and services to the product market, in return business generate revenue from the
product market

LEAKAGE

1.Put aside for future spending, i.e. savings (S) in banks accounts and other types of deposit
2.Paid to the government in taxation (T) e.g. income tax and national insurance
3.Spent on foreign-made goods and services, i.e. imports (M) which flow into the economy

INJECTIONS

1.Capital spending by firms, i.e. investment expenditure (I) e.g. on new technology
2.The government, i.e. government expenditure (G) e.g. on the NHS or defence
3.Overseas consumers buying UK goods and service, i.e. UK export expenditure 

We have to remember in the circular flow diagram is that everyone’s expenditure (leakage) is someone else’s
receipt (injection).

An economy is in equilibrium when the rate of injections = the rate of withdrawals from the circular flow.