What concept depicts the flow of money and goods between households and firms in an economy?

What concept depicts the flow of money and goods between households and firms in an economy? The answer is the circular flow of income.

In its simplest two-sector form, the model contains households and firms. Households supply labor and other factors of production; firms pay them wages, rent, interest, and profits. Households then use that income to buy the goods and services produced by firms, creating a repeating circuit of real resources and monetary payments.

The idea has roots in Richard Cantillon’s economic writings and was visualized by François Quesnay in the 1758 Tableau économique. Later economists developed it into a foundation for national-income accounting and macroeconomics. Income earned, output produced, and expenditure made are closely related measures of the same economic activity.

The basic diagram is an abstraction, not a complete picture of an economy. Expanded versions add government, financial institutions, and the foreign sector. Savings, taxes, and imports are called leakages, while investment, government spending, and exports are injections. The circular-flow model is often confused with aggregate supply and demand, which analyzes economy-wide prices and output rather than the movement of payments among sectors.