The Circular Flow of Income Model shows the key relationships of income, expenditure and production in the economy.
Expenditure, income and goods and services flow around the sectors of the economy because of economic activity.
This two sector circular flow model diagram makes the relationships and flows easier to see. The two sector model has only two sectors – the household and business sector.
This model can be extended to a five sector model with the added sectors of the government, financial and overseas sector.
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