A Look Back at Circular Flow
In the circular flow model, the economy has three primary sectors: private, public, and foreign. The private sector is further divided into households and businesses. Each sector contributes to the gross domestic product. Households provide the factors of production that businesses use to produce goods and services. In addition, government provides the public goods not provided by the private sector. Furthermore, the foreign sector acts as a source of the factors of production as well as a source for goods and services. The foreign sector also functions as a market for domestic production.
GDP is represented three ways in the circular flow model. The goods and services that business and government provide represent the value of all domestic production. The spending that the private, public, and foreign sector adds to the circular flow represents total spending. Finally, the rent, wages, interest, and profits earned in the factor market are a nation's income.