The circular-flow model of income and expenditures in the economy includes _____

Question

Quizplus · Accepted Answer

The circular-flow model of income and expenditures includes households, firms, governments, and the rest of the world. This model shows the flow of goods, services, and money between these four sectors of the economy. Households provide the factors of production (land, labor, capital, and entrepreneurship) to firms, which produce goods and services that are sold to households and the rest of the world. In exchange, households receive income in the form of wages, salaries, profits, and rent. They use this income to purchase goods and services from firms and pay taxes to governments. Governments use the tax revenue to provide public goods and services and transfer payments to households, firms, and foreign countries. The rest of the world imports goods and services produced by domestic firms and exports goods and services produced by foreign firms. This creates a circular flow of income and expenditures in the economy.

The Circular-Flow Model of Income and Expenditures in the Economy