Macroeconomics

‭In‬‭a‬ ‭balanced‬‭circular‬‭flow‬ ‭,‬‭the‬ ‭total‬‭income‬‭earned‬‭by‬‭households‬‭equals‬‭the‬‭total‬‭expenditures‬‭on‬ ‭goods‬ ‭and‬‭services‬‭by‬‭households‬ ‭.‬‭This‬‭equilibrium‬‭helps‬‭maintain‬‭the‬‭economic‬‭cycle.‬‭However,‬‭the‬ ‭circular‬ ‭flow‬ ‭model‬ ‭doesn't‬ ‭explicitly‬ ‭account‬ ‭for‬ ‭savings‬ ‭and‬ ‭investment.‬ ‭In‬ ‭reality,‬ ‭a‬ ‭portion‬ ‭of‬ ‭household‬ ‭income‬ ‭is‬ ‭saved,‬ ‭and‬ ‭frms‬ ‭invest‬ ‭in‬ ‭production‬ ‭and‬ ‭expansion.‬ ‭Nonetheless,‬ ‭the‬ ‭model's‬ ‭simplicity helps highlight the core flow of economic activity.‬ ‭The Expanded Circular Flow Diagram‬ ‭While‬ ‭the‬ ‭basic‬ ‭circular‬ ‭flow‬ ‭model‬ ‭focuses‬ ‭on‬ ‭households‬ ‭and‬ ‭frms,‬ ‭more‬ ‭comprehensive‬ ‭versions,‬ ‭such‬‭as‬‭the‬ ‭expanded‬‭circular‬‭flow‬ ‭include‬‭the‬‭roles‬‭of‬ ‭the‬‭government‬‭sector‬‭(taxes,‬‭subsidies,‬‭and‬ ‭public spending) and the foreign sector (exports and imports)‬ ‭.‬

‭The elements and loops of the expanded circular flow diagram are broken down as follows:‬

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