For example, with wages from work, households can then buy goods produced by firms. Total amount spent on goods and services. Therefore income flows from firms to households. For example, firms have to pay workers to produce the output. (profit, dividends, income, wages, rent) This is the total income received by people in the economy. The total value of output produced by firms. This circular flow of income also shows the three different ways that National Income is calculated. Individuals who consume goods and receive wages from firms. Companies who pay wages to workers and produce output. In the very basic model, we have two principal components of the economy: It can be made more real life and hence more complex by adding in the government sector and the financial and international trade sector also.The Circular flow of income diagram models what happens in a very basic economy.The CFD is a very basic form of economic exchange model.The household pays for the goods and services bought in terms of money, (in the form of spending by the people on goods and services), which goes through the firms back to the household in the form of wages.Thus the factors of production, and goods and services move from the household through the factor market to the firm and then finally to the product market.The household sector pays for it (their expenditure), which in turn is income for the firm (going through the product market.).We(the firm and I) produce a product (a finished good) which is sold back to the household sector through the product market.
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