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Word Count: 1,052
An accepted general model of economic behaviour in Macroeconomics is the Circular Flow of Income which depicts a simplified view of how sections of the economy output income and expenditure fit together Factors of production in the economy are generally categorised as land labour and capital Households are the ultimate owners of firms therefore it is accurate to say that households people sell their land labour and capital to firms producers for which they receive income in the form of rent wages and profit dividends and royalties Firms then use the factors of production to produce goodsservices and sell them to households who pay for them with their income Money is normally exchanged for goodsservices therefore as Figure 1 demonstrates goodsservices flow around the economy in the opposite direction to money Spending on goodsservices factor incomes rent wages profit Figure 1 A closed economy only has two subsisting sectors households and firms however an open economy must take external influences into account such as government and financial institutions Figure 2 shows that Households save some of their income and it does not flow back into the economy automatically This is termed leakage Taxes are also a leakage Conversely an injection is money which adds to the level of economic activity Both government not household spending on goodsservices and investments are injections Social welfare payments and similar government transfer payments do not add to the circular flow IMPORTS leakage EXPORTS injection Spending on goodsservices
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