![]() The circular flow model is a fundamental representation of macroeconomic activity among the major players in the economy-consumers, producers, government, and the rest of the world. The circular flow model provides a easy way of getting the "big picture" and of seeing how the key parts of the macroeconomy fit together. ![]() In particular, the circular flow is a model of the continuous production and consumption interaction among the four major sectors of the macroeconomy-household, business, government, and foreign-using the three macroeconomic markets-product, resource, and financial. Most modern currency is fiat money.ĬIRCULAR FLOW: A model of the continuous movement of production, income, and the services of scarce resources that flow between producers and consumers. This constitutes about 30 to 40 percent of the M1 money supply. economy is issued by the Federal Reserve System (paper) and the U.S. Metal coins are also frequently included under the generic heading of currency. PAPER CURRENCY: Paper usually issued by the national government that are used as money. However, each of these models gives equal importance to the role of consumers, firms and government and the interaction between them in overall economy.AmosWEB means Economics with a Touch of Whimsy! Both the circular flow model and the income and expenditure model describe economic activity in a different way. Furthermore, it is important to note that the amount of income generated depends on the production and expenditures of firms, consumers and the government. None of funds used in the production of products are misplaced. Income can be in the form of wages to workers, profits to corporations, interest to a lender or rent to a landlord. Outputs are comprised of familiar components of the GDP such as consumption, investment, government spending and net exports (exports less imports). Excluding taxes and depreciation, the spending on outputs becomes income to factors of production. In other ords, resources are used to produce the goods that people consume. Also read about Open-access GoodsĬonsequently, the expenditure gets transferred to business owners, landlords, and other resource owners. This is a simplified version of the circular flow model where the spending that flows into the Product Market gets funneled into the Factor Market. With limited exceptions, the total value of market incomes must equal the total value of expenditures because every dollar spent on output becomes a dollar of income for someone else. The detailed model of incomes and expenditures looks at GDP in a different way by dividing it into two sides: demand (expenditures) and supply (income). The collection of taxes funds government spending which can be in the form of infrastructure, welfare payments, and collective services, all of which contribute to GDP growth. The government also regulates and collects taxes from firms. The government collects taxes from households which reduces the expenditures on goods and services. The government also plays a key role in the circular flow model by intervening between firms, households and the markets. It is important to note that firms use factors of production to produce finished products which households consume in order to provide factors of production. The loop allows the flow of income, preventing the households or business firms to keep all of the money which results in continued economic activity that is sustainable in the long run. As the Product Market and Factor Market combines, a closed loop of the flow of money becomes evident. In exchange for the use of factors of production, firms compensate households with salaries and wages. Households can be thought of as sellers in this case as they provide the labor, capital and other factors of production to firms. In order to have a finished product, firms require labor, capital, real estate and more. The Factor Market completes the flow of money in which the role of households and firms is switched compared to the Product Market. If the circular flow model did not have the Factor Market to complete the circular cycle, all the money in the economy would be kept by businesses and all the finished products would be kept by households. In the Product Market, the households consume and purchase the goods and services that are sold by the business firms, creating exchange of currency (dollars) between the households who are receiving a finished product and the business firms who are making a profit. This model is composed of households and business firms and it divides the markets into two categories, Product Market and Factor Market. ![]() ![]() The circular flow model reflects the flow of money, goods and services throughout the economy. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |