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Basic diagram of the circular flow of income. The functioning of the free-market economic system is represented with firms and households and interaction back and forth. The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanges in a closed circuit and correspond in value, but run in the opposite direction.
In the circular flow model, injections into the economy include investment, government purchases, and exports while leakages include savings, taxes, and imports. Lesson Objectives By the end of this lesson, you should be able to: 1  Explain the movement of money in simple markets using the circular flow model. 2  List factors of production. 3  Observe the flow of goods and services among businesses, government and households. 4  Describe injections and leakages in the circular flow model.