What model explains the interactions between individuals, businesses, and government in an economy?

The Circular Flow of Income model effectively illustrates the interactions between individuals, businesses, and government in an economy. This model represents the flow of money, goods, and services among these sectors, demonstrating how households provide factors of production—such as labor— to businesses, while businesses produce goods and services that are consumed by households.

In addition to these primary actors, the model incorporates the role of government, which collects taxes from individuals and businesses and injects money back into the economy through spending on public goods and services. This circular flow indicates how economic activity is sustained through the continuous movement of resources and spending, emphasizing the interdependence of different sectors.

Understanding this model is crucial as it provides a comprehensive framework for analyzing economic activity, showing how the decisions and actions of one group directly influence the others. This interconnectedness plays a vital role in overall economic health and policy-making.