Do you know what is the circular flow of goods and services? If you do not know then this article may help you to understand it clearly.
Different participants involve with the exchange process in an economy and each of the participants is interdependent with one another. There are four major participants in an economy, these are:
- Business sector
- Households sector
- Government sector and
- Foreigners or the rest of the world
These four groups of participants interact with one another in factor markets (resource markets) and product markets, which ensures the circular flow of goods and services to the economy. This has been shown in the diagram of the circular flow of goods and services with the foreign sector.
Circular Flow of Goods and Services
Businesses incur costs to collect resources from the factor market (resource markets). So resource markets get money from the businesses and in return resource market supply required resources to the business. These resources are used to produce goods and services to deliver to the economy.
On the other hand, a business sells its goods and services to the product market, in return business generate revenue from the product market.
Households provide their labor, land, capital and other human skills to the resource market and in return, they get money income (rent, wage, interest, profit etc) from the resource market.
Households provide goods and services to the product market and in return participants of product, market collect consumption expenditures of the households.
Government sector stay middle in the circular flow of goods and service process, here government collect net taxes (sells and income) from both business and households. As a responsible government provides required goods and services to the business and households. The government also collect resources from the resource market and goods and services from the product markets for this government have to incur expenditures which are got by the resource market participants.
Rest of the World
This application for an open economy where export and import of goods and services are involved. Through export, product markets will supply product and services for profit and for import of goods and services for product market we have to incur expenditures. With export foreign expenditures are involved and with import domestic expenditures are involved.
These all participants exchange their required resources with each other to ensure proper utilization of resources and fluent flow of goods and services.