We can depict the flows of payments and production within the global economic system as a circular flow between producing units (mainly businesses and governments) and consuming units (principally households). (See Exhibit 1.1.)
In the modern economy, households provide labor, management skill, and natural resources to business firms and governments in return for income in the form of wages and other payments.
Most of the income received by households is spent to purchase goods and services from businesses and governments.
In 2003, for example, nearly 97 percent of the more than $9 trillion in total personal income received by individuals and families in the United States was spent on the consumption of goods and services or paid out in taxes to purchase government services.
The remainder of personal income a little more than 3 percent was set aside as savings.
The result of this spending is a flow of funds back to producing units as income, which stimulates them to produce more goods and services in the future.
The circular flow of production and income is interdependent and never ending.