📐Module 2 · Level 5
Circular Flow
How money flows between households, businesses, government, and the rest of the world.
The Basic Model
In the simplest economy, households provide labor to firms and receive wages. Firms produce goods and sell them to households. Money flows in a circle — wages from firms to households, spending from households to firms.
Adding Complexity
The real economy has more players: government (taxes and spending), the financial sector (savings and investment), and the foreign sector (imports and exports). Each adds 'injections' (investment, government spending, exports) and 'leakages' (savings, taxes, imports).
- •The circular flow shows how money moves through the economy
- •Injections (I + G + X) must equal leakages (S + T + M) at equilibrium
- •Government can stimulate the economy by increasing injections
- •Understanding circular flow is key to understanding fiscal and monetary policy
💡 Did You Know?
India's savings rate is about 30% of GDP — one of the highest in the world. These savings, when invested, fuel economic growth through the circular flow.