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 government for revenue.
Taxes are the income the government receives from households and business 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. Investment as used in the text is a financial transaction, like buying bonds or stock. All of the above describe investment. The International Sector 1. Canada and Japan.