In a three-sector economy, which consists of households, firms, and the government, the circular flow of income and output illustrates the continuous movement of money, resources, and goods and services within the economy. The three-sector model expands on the simple two-sector model by including government activity, which affects both production and income through taxation and government expenditure. In this model, households supply factors of production—labor, land, and capital—to firms. In return, they receive factor incomes in the form of wages, rent, interest, and profits. These incomes constitute the primary source of revenue for households, which they use to purchase goods and services produced by firms. This creates the flow of expenditure from households to firms, also called consumption expenditure, which generates revenue for firms. Firms use the revenue earned from selling goods and services to pay for the factors of production provided by households. This completes the primary circular flow between households and firms. However, the