Macroeconomics

The Circular Flow of Dollars Through the Economy

This figure is a more realis-

tic version of the circular flow diagram found in Chapter 2. Each yellow box repre-

sents an economic actor—households, firms, and the government. Each blue box

represents a type of market—the markets for goods and services, the markets for the

factors of production, and financial markets. The green arrows show the flow of

dollars among the economic actors through the three types of markets.

F I G U R E

3 - 1

Income

Private saving

Taxes

Consumption

Firm revenue

Investment

Public

saving

Government

purchases

Factor payments

Markets for Factors

of Production

Markets for

Goods and Services

Financial

Markets

Government

Firms

Households

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what determines their level of production (and, thus, the level of national

income). Then we examine how the markets for the factors of production

distribute this income to households. Next, we consider how much of this

income households consume and how much they save. In addition to dis-

cussing the demand for goods and services arising from the consumption 

of households, we discuss the demand arising from investment and govern-

ment purchases. Finally, we come full circle and examine how the demand

for goods and services (the sum of consumption, investment, and govern-

ment purchases) and the supply of goods and services (the level of produc-

tion) are brought into balance.