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economics_basicsFirms produce goods and services on demand for the government, households and other countries to consume. They provide employment, generate income and create demand within the economy. They act as a cornerstone for yearly GDP (Gross Domestic Product) determination. Governments collect taxes on sale of the goods (VAT) and levied taxes to maintain public sector spending and investments.

The biggest leakage is transfer payments: e.g. pensions and unemployment benefits where payments are made for no actual service. Money is circulated back to firms to produce more goods and services.

Households receive payments in a form of wages and salaries, dividends, shares or rent for supplying labour, capital and land.  And the government takes a small portion in the form of direct and indirect taxes (money leakage for the cycle).

Household income is spending for domestically and internationally produced goods and services. In the first instance, money is circulated back to the cycle.  On the second instance, money flows away from it. Some portion is saved either using a financial institution (active capital) or non financial institution (passive capital - withdrawal from the cycle).

The more households consume, the faster the entire cycle flows.  Nonetheless active savings are crucial as they provide more trust for financial institutions about economical health and liquidity for further injections.