An Expanded Circular-Flow Diagram: How Money Flows Through the EconomyA circular flow of funds connects the four sectors of the economy—households, firms, government, and the rest of the world—via three types of markets: the factor markets, the markets for goods and services, and the financial markets. Funds flow from firms to households in the form of wages, profit, interest, and rent through the factor markets. After paying taxes to the government and receiving government transfers, households allocate the remaining income—disposable income—to private savings and consumer spending. Via the financial markets, private savings and funds from the rest of the world are channeled into investment spending by firms, government borrowing, foreign borrowing and lending, and foreign transactions of stocks. In turn, funds flow from the government and households to firms to pay for purchases of goods and services. Finally, exports to the rest of the world generate a flow of funds into the economy and imports lead to a flow of funds out of the economy. We can determine the total flow of funds by adding all spending—consumer spending on goods and services, investment spending by firms, government purchases of goods and services, and exports—and then subtracting the value of imports. This is the value of all the final goods and services produced in the United States—that is, the gross domestic product of the economy.