Page 67 - Macroeconomics. book docx_Neat

6-1 Introduction

The circular flow of economic activities is a simple model that explains how the

economy works on a daily basis. It shows how money, goods, services, and income

move continuously between different participants in the economy. The main idea is that

economic activities are interconnected, and what one group spends becomes income
for another group.

Figure 6-1

Circular flow of economic activity

Households

Households provide factors of production such as labor, land, capital, and
entrepreneurship. In return, they receive income in the form of wages, rent, interest,

and profit. Households spend most of their income on goods and services, which keeps

the economic cycle active.

Firms

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