Government: Utilizes the resources in the economy to provide public goods and services and regulate the functioning of the economy.Ĥ. Firms: Production Units/Businesses that produce goods and services by utilizing factors of production.ģ.

Households: They own all the resources in the economy and are comprised of individuals/consumers.Ģ.

The model was then improvised with the practical applicability in terms of the flow of money that Karl Marx construed.įurthermore, a significant improvement was made in 1933 by John Maynard Keynes and his assistant, which further developed the concept for the United Nations that is the current model used now.īefore getting into the different parts of the model, below are the different agents and factors of production involved in all the models:Įconomic agents, namely households, firms, governments, foreign, and financial sectors, that display the circular flow of goods & services, factors of production, payments & receipts, and savings & investments in the markets.ġ. It was conceptualized back in the 1730s by the economist Richard Cantillion, and it was visualized by François Quesnay. It helps in the calculation of national income and is one of the key indicators in macroeconomics. The circular flow model of the economy is a simplified aid that illustrates how money flows throughout the economy, or in an economic sense, the redistribution of income between the decision-makers for resources and production.

Circular flow model