Circular Flow of Goods And Income
There are two sectors in the circular flow of goods & services. One is household sector and the other is the business sector which includes firms. Households demands goods & services, Firms supply goods & services. An exchange takes place in an economy. In monetary economy, firms exchange goods & services for money. Firms’ demands factors of production and households supply factors of production. Firms pay the payment in terms of wages, rent, etc. This is circular flow of goods. On the other hand, household gives money to firms to purchase the goods & services from firms, and firms’ gives money to households in return for factors of production.