The foreign sector includes all economic transactions between the domestic economy and the rest of the world, such as exports, imports, and financial flows. They collect savings from households and provide loans to businesses, helping allocate resources efficiently and maintain stability in the financial system. įinancial institutions, such as banks and investment firms, facilitate the flow of funds between households, firms, and the government.Additionally, the government can influence the economy through fiscal policy (taxation and government spending) and monetary policy (managing money supply and interest rates). The government also regulates economic activity and redistributes income through social welfare programs. The government sector collects taxes from households and firms and uses this revenue to provide public goods and services, such as education, healthcare, and infrastructure. Firms also pay wages, rent, and profits to households in return for the resources they provide. They generate revenue by selling these goods and services to households, other firms, or the government. įirms produce goods and services using resources (labor, capital, and natural resources) provided by households.Households spend their income on consumption, save it, or pay taxes to the government. Households represent individuals and families who consume goods and services, supply labor, and receive income from firms. The main sectors of the circular flow model are: The circular flow model is a representation of an economy that illustrates the flow of resources, goods, services, and income between different sectors.
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