The Households supply labour to the firms
The goods the firms produce are consumed by the households.
REAL FLOW OF GOODS & SERVICES

If these was only two sectors the income of the households would exactly equal their expenditure and the monetary would be a closed system.

As we add in the other sectors we get the possibility of injections in the model as well as leakages out of the model.

Injections into the system flow around generating further demand and incomes.

The lower the leakages the more injection will flow around the system and the higher the multiplier effect.

An important difference between leakages and injections is their respective relationship with National Income.

Injections are independent of the income level and are exogenous. (Outside)

Investment is determined by expectations about future levels of demand and interest rates.

From the diagram we can see that there are 3 methods for calculating the income of a nation and all three give us the same answer.

The Circular Flow of Incomes Diagram

In this model we have 5 sectors made up of: