Households own the factors of production and sell them to firms in return for income. Business firms combine the factors of production into goods and services and sell them to households and the international sector in exchange for revenue. The international sector buys and sells goods and services to business firms. The circular flow diagram illustrates these relationships. Business firms sell the goods and services they produce to the firms.
Taxes are the income the government receives from households and firms.
In reality, the government may interact directly with foreign consumers and businesses, but most government activity with the international sector occurs when the government uses business firms as intermediaries. Economic Resource Links Copyright Houghton Mifflin Company . All Rights Reserved.