This lesson introduces the circular flow model of the macroeconomy. The circular flow is a simple model based on the buying and selling relation between the household and business sectors which occurs through the product and factor markets. As a bonus, we complicate the simply circular flow model, by including the government and foreign sectors, and the financial markets. This lesson introduces several important macroeconomic concept, but more importantly, provides a useful model for interpreting macroeconomic activity.

• In the first unit, we get an introduction to the simplest circular flow model that includes the household and business sectors and the product and factor markets.
• The second unit builds on the simple model by introducing the financial markets, which highlights the importance of household saving and business investment.
• The circular flow is expanding further in the third unit, with the introduction of the government sector, which highlights how taxes are diverted away from the household sector.
• The fourth unit adds one more sector to the circular flow model, the foreign sector, which illustrates the roles played exports and imports.
• The fifth unit wraps up this lesson by showing how several key measures of production and income revealed in the analysis of gross domestic production related to the circular flow.

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