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CIRCULAR FLOW OF INCOME A visualization of all interactions in a market economy
Injections (GXI) 1. Gov. Spending 2. Exports 3. Investments Firms Factor Market Product Market Payment for Goods & Services Goods & Services Land Labor Capital Entrepreneurship Rent Wages Interest Profit Leakages(TMS) 1. Taxation 2. Imports 3. Savings Households
HOUSEHOLDS • All workers and consumers • Own factors of production
FIRMS • Producers of goods and services • Made up of businesses of various types and sizes, from small family-run proprietorships to large corporations
LAND • All the natural resources found on or under the ground that are used to produce goods & services
LABOR • All the human time, effort, and talent used to produce goods and services
CAPITAL • All the resources made and used by people to produce and distribute goods & services
ENTREPRENEURSHIP • Combination of vision, skill, ingenuity, and willingness to take risks that is needed to create and run a new business
FACTOR MARKET • The market for the factors of production – land, labor, capital, and entrepreneurship
RENT • The payment made and the income received for the use of land (i.e. the payment for the use of a natural resource and not simply the payment for the use of an apartment building or other building
WAGES • The payment made and the income received for the use of labor (includes commissions, tips, and employee benefits)
INTEREST • The payment made and the income received for the use of capital
PROFIT • The income received from the activity of enterprise (the income which is left over after all the factors of production have been paid). Profits can be thought of as a reward for enterprise.
GOODS • Physical objects, such as food, clothing, and furniture, that can be purchased.
SERVICES • Work that one person does for another for payment
PAYMENT FOR GOODS & SERVICES • The expenditure by households on goods and services
PRODUCT MARKET • The market for consumer goods and services
INJECTIONS • Items which add to the circular flow of income
GOVERNMENT SPENDING • Government purchases goods and services from firms • Government also disburse transfer payments such as welfare and subsidies
EXPORTS • Goods and services produced in 1 country and sold to another country.
INVESTMENTS • Spending that results in a physical increase in plant, equipment, or machinery.
LEAKAGES • Income received from circular flow which does not flow directly back
TAXATION • Government taxes both firms and households
IMPORTS • Goods and services that households and firms purchase that are from outside the domestic economy.
SAVINGS • Income received but not spent on consumption