Shahid Ullah Macro Economics ID: 14007

CIRCULAR FLOW OF NATIONAL:

Exports Imports
Net trade

Taxes Taxes
Government
Services Services
International Receipts
International payments

Investments savings
Financial institution

Consumption Expenditure

Product Market

Firm Resources: Salaries, Interest, Rent and Household

Wages.

Factors: Land, Labor, Capital and Entrepreneur.

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Shahid Ullah Macro Economics ID: 14007

Circular Flow:
The circular flow of national income is a simplified economic model that illustrates the flow of
goods, services, and payments between households and businesses in an economy. It provides a
visual representation of the interdependence of households and businesses in generating income
and sustaining economic activity. The circular flow typically involves two main sectors:
households and firms (businesses).
Here is an explanation and a simple representation of the circular flow:
1. Households:
 Consumption (C): Households provide factors of production (such as labor) to
businesses in exchange for wages, salaries, and other income. They use this
income to purchase goods and services from businesses.
 Taxes (T): Households pay taxes to the government. Taxes are deducted from
household income.
 Savings (S): Households may save a portion of their income for future use or
investment.
2. Firms (Businesses):
 Production (P): Firms produce goods and services using factors of production
(land, labor, capital) provided by households.
 Income (Y): Firms generate income through the sale of goods and services. This
income is distributed to households as wages, salaries, and profits.
 Taxes (T): Firms pay taxes on their profits to the government.
 Investment (I): Firms may invest in capital goods (machinery, buildings) to
expand production capacity.
3. Government:
 Tax Revenue (T): The government collects taxes from both households and
firms.
 Government Spending (G): The government spends money on public goods and
services, such as infrastructure, education, and defense.
4. Financial Markets:
 Savings (S): Households may deposit their savings in banks or other financial
institutions.

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Shahid Ullah Macro Economics ID: 14007

 Investment (I): Firms can borrow money from financial markets to finance
investment projects.
 Interest Payments: Financial institutions pay interest to households for their
savings, and firms pay interest on loans.
5. Foreign Sector:
 Exports (X): Firms may sell goods and services to foreign countries.
 Imports (M): Households and firms purchase goods and services produced in
other countries.
 Net Exports (X - M): The difference between exports and imports represents the
net flow of goods and services to and from other countries.

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