Circular Flow of Income

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Before doing the comparison of Britain with Germany using the circular flow diagram, it is important to understand the circular flow diagram in detail. The circular flow diagram as seen in Figure 1 (ATTACH FIGURE) shows the link between the households and the firms. The households, according to Pagoso et al. (2008), are the basic consuming units of the economy while the firms are the basic producing units of the economy. Since the production and consumption are two very important components of the economy, they are the basic features of the circular flow diagram. The household sector in this case applies to everyone. As Amosweb (2010) states, this sector is responsible for the consumption in the economy. Also, it owns the productive resources in the economy that are needed by the firms for the production process to be complete. The business sector (that includes all kinds of firms and business institutions) is responsible for the collection of productive resources and their conversion into goods and services that can be sold. Its role also includes the buying of capital goods through investment expenditures. The third sector that is the government sector consists of the government, the federal state, and banks, etc. The main role of this sector is to collect taxes and invest in government expenditures. The fourth and the last sector in the flow diagram is the foreign sector. This sector includes as Amosweb (2010) states, everyone outside the domestic country. This sector revolves around the exports and imports of a certain country.Overall, the households basically consume the goods and services provided by the firms. Firms on the other hand are sources of income for the people (households) that work in them. Households pay taxes that are a source of revenue for the government and the governments, on the other hand, spend on households. Households also save and firms invest. Exports and imports also are part of the economy.