The circular flow model shows the continuous flow of money between four key sectors in the economy: households, firms, government, and the external sector. Households receive income from firms through wages and salaries, which they use to buy goods and services from firms. Firms then use this money to pay for inputs from households in the form of wages, and for inputs from the government sector. The government sector collects taxes from households and firms to fund public spending. The external sector involves imports and exports between a country and other countries.

1. The Circular Flow Model
EdExcel AS Economics 2.4.1

2. The Four Key Parts of the Circular Flow Model
External
Sector
Households
Households receive income through wages
and salaries from their jobs and investments
and they then buy goods and services
supplied by firms (consumer spending)
Businesses
Businesses hire land, labour & capital inputs
when making products for which they pay
wages and rent. Firms receive payment from
consumers (creating revenues and profits)
Government
Government collects taxes (T) to fund
spending on public services e.g. education,
healthcare and defence and welfare
assistance. State spending is labelled as G
The UK buys imports from other countries,
(M) and overseas businesses and consumers
buy UK products – known as exports (X)

3. The Basic Circular Flow Model
Households Government Firms
Purchases of goods and services
£
Demand

4. The Basic Circular Flow Model
Households Government Firms
Purchases of goods and services
£
Demand
Wages, dividends, interest, profits and rent
£
Incomes

5. The Basic Circular Flow Model
Households Government Firms
Purchases of goods and services
£
Demand
Wages, dividends, interest, profits and rent
£
Incomes
Taxes
Social
Transfers

6. Domestic Circular Flow of Income & Spending
Households Government Firms
Purchases of goods and services
£
Demand
Wages, dividends, interest, profits and rent
£
Incomes
Taxes
Social
Transfers
Govt
Purchases
Taxes

7. Circular Flow with an External Sector
Households Government Firms
Purchases of goods and services
£
Demand
Wages, dividends, interest, profits and rent
£
Incomes
Taxes
Social
Transfers
Govt
Purchases
Taxes
The Domestic
Circular Flow
Households
Government
Firms
Rest of the
World
Imports Exports
The External
Trade Sector of
the Economy

8. Injections & Leakages within the Circular Flow
Injections
Investment
Exports of goods and services
Government spending
Leakages
Saving
Imports of goods and services
Taxation
There are three types of
injection of extra spending into
the circular flow model.
There are three types of
leakage or withdrawal from
the circular flow.

9. The Circular Flow Model
EdExcel AS Economics 2.4.1