Circular flow of income model: Problems with the model

The circular flow of income model -- also known as the five sector model -- has to be one of the most common models for Eco students.

The model is very useful for understanding the basics of how an economy works -- how money moves around and how different sectors interact with each other.

But! The model has limitations you should know about. We can't use the five sector model to explain everything about the economy.

A general limitation (0:35)
Specific limitation: no household borrowing (2:35)
Specific limitation: no imports purchased by firms (3:58)

I've also got a blog post on this very topic:
mrsymonds.com/blog/the-circular-flow-of-income-problems-with-the-model

You can also see more videos on the circular flow of income:
   • The five sector model/circular flow o...