Households save a fraction of income. Savings flow through the financial market and return to firms as investment, growing the capital stock. Depreciation erodes it. Drag boxes to rearrange.
The circular flow diagram shows the core of a market economy. Households and firms interact through product and factor markets.
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.
Now, households don't spend all income. They save the remainder Sₜ = Yₜ − Cₜ, which flows to the financial market. These savings become investment, adding to the capital stock K. Meanwhile, depreciation d·Kₜ erodes capital over time.
Capital accumulates as Kₜ₊₁ = d·Kₜ + Yₜ − Cₜ (where d < 1). Economic growth happens if capital accumulates faster than it depreciates.