The economy's income and expenditure The following diagram presents a circular-flow model of a simple economy.

1. The economy's income and expenditure

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.Based on this model, households earn income when blank purchase blank in markets for factors of production. The first blank is either households or firms. And the second blank is either labor and capital or goods and services.