Major Sectors/Actors in the Circular Flow Model It shows the flow of money, goods, and services, and factors of production through the economy.” – Paul Krugman. “A circular flow diagram is a simplified representation of the macroeconomy. It shows the regular flow of products, factors, and money received and paid among the household, business, government, and foreign sectors through the product, resource/factor, and financial markets. In another word, the circular flow of economic activities is defined as the flow of payments and receipts for goods and services, and factor services between different sectors/actors/agents of an economy. The circular flow is an economic model or tool used to show the continuous movement of output and input/factors of production, money payment, and received in buying and selling of output and inputs between producers, resource suppliers, and consumers. These flows of products, factor inputs, payment for products, and payment for factors of production create a macroeconomic circular flow model. In carrying out such economic activities there are different flows like the flow of goods and services, factors of production, factor payment, payment for goods and services, etc.
It means consumers are involved in buying goods and services, producers are producing and selling goods and services, and the government is there to become part of such transactions, as well as for control mechanisms. The economy is a system in which all the economic agents are interdependently working and doing their respective economic activities.
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