An interactive diagram showing how households and firms interact through product and factor markets. Drag boxes to rearrange.
The circular flow diagram is the foundational model of a market economy. Households and firms are connected through two markets.
In the product market (top), firms supply goods & services and households purchase them. In the factor market (bottom), households supply factors of production and firms hire them.
The monetary flow (solid, inner) circulates clockwise: expenditure → revenue → factor payments → income.
The real flow (dashed, outer) circulates counter-clockwise: goods flow to households, factors flow to firms.
Every dollar spent by one agent is income for the other — GDP measured by expenditure, income, or output are equivalent.