How does money flow in the economy?
Consumers, businesses, and governments supply each other with factors of production in the form of land, labor, capital, and talent. In turn, these forms of income are spent to bou the goods and services they helped produce. Consumer spending depends on the wants and needs of individuals and families, such as food, health, and eduction. Business spending is directed toward a return of profit, for example, by investing in more employees and training them or replacing old machines with ones that are more efficient. Governments have a variety of social and other public objectives, such as education, public safety, and defense. In many ways, savings represent a leakage from the circular flow of economic activity because they are not used immediately to buy goods and services or to generate income. If savings were kept out of circulation, the economic consequences could be devasting. Because savings usually are deposited in financial institutions, however, they are pumped back into the economy in the form of loans.