The circular flow model illustrates how money flows between different economic agents in an economy. It shows households receiving income from firms in exchange for supplying factors of production like labor. Households then use this income to purchase goods and services from firms. Firms use the revenue to pay for inputs and factors of production, completing the circular flow. The model can be simplified into a two-sector closed economy or expanded into a four-sector open economy to include government spending and trade. It demonstrates how national income, also known as GDP, is calculated and how injections and leakages can cause fluctuations in overall income and production levels in an economy.
The circular flow model illustrates how money flows between different economic agents in an economy. It shows households receiving income from firms in exchange for supplying factors of production like labor. Households then use this income to purchase goods and services from firms. Firms use the revenue to pay for inputs and factors of production, completing the circular flow. The model can be simplified into a two-sector closed economy or expanded into a four-sector open economy to include government spending and trade. It demonstrates how national income, also known as GDP, is calculated and how injections and leakages can cause fluctuations in overall income and production levels in an economy.
The circular flow model illustrates how money flows between different economic agents in an economy. It shows households receiving income from firms in exchange for supplying factors of production like labor. Households then use this income to purchase goods and services from firms. Firms use the revenue to pay for inputs and factors of production, completing the circular flow. The model can be simplified into a two-sector closed economy or expanded into a four-sector open economy to include government spending and trade. It demonstrates how national income, also known as GDP, is calculated and how injections and leakages can cause fluctuations in overall income and production levels in an economy.
The circular flow model illustrates how money flows between different economic agents in an economy. It shows households receiving income from firms in exchange for supplying factors of production like labor. Households then use this income to purchase goods and services from firms. Firms use the revenue to pay for inputs and factors of production, completing the circular flow. The model can be simplified into a two-sector closed economy or expanded into a four-sector open economy to include government spending and trade. It demonstrates how national income, also known as GDP, is calculated and how injections and leakages can cause fluctuations in overall income and production levels in an economy.
Four Sector Circular Flow of Income Key Ideas about the Circular Flow Model Source: https://www.intelligenteconomist.com/circular-flow-of-income/
The circular flow of income is illustrated in the circular-flow model
of the economy, which is one of the most significant basic models within economics. This model shows how different units in an economy interact, breaking things down in a highly simplified manner. It shows how household consumption is a firm’s income, which pays for labour and other factors of production, and how those firms provide households with income. The circular flow of income demonstrates how economists calculate national income, or gross domestic product (GDP). Key Terms for Circular Flow of Income National Income Saving National Output Withdrawal (leakage) National Expenditure Investment National Capital Stock Injection Wealth Open Economy Consumption Closed Economy Economic Agents in the Macroeconomy and Possible Conflicting Objectives
HOUSEHOLDS FIRMS GOVERNMENT
Agent Objectives Conflict? Consumers Lower prices; VFM; Firms pursuing profit; Competitive markets Govt. regulation Firms Profit; Expansion; Govt regulation, taxes; Monopoly market Trade Unions Government Society; Popularity More regulation for households and firms Workers Higher wages; job Firms maximising CONSUMERS WORKERS security profit; Govt taxation The Circular Flow of Income: 2 Sector ‘Closed’ Economy The Circular Flow of Income: 4 Sector ‘Open’ Economy INJECTIONS ADD INCOME G = Government Expenditure I = Investment X = Exports
LEAKAGES REDUCE INCOME
The economy is in equilibrium, with no T = Taxation tendency for GNP to rise or fall, when S = Savings M = Imports G+I+X=Y+S+M Injections ↑ into and Leakages ↓ from the CFI • Injections = G + I + X and Leakages = T + S + M • If Injections > Leakages, GDP will rise (CP) • If Leakages > Injections, GDP will fall (CP) • If Leakages = Injections, GDP is in equilibrium (CP) Equilibrium means ‘a state of rest’ How can you link the CFI model to a bath?! The Circular Flow of Income: 4 Sector Open Economy
National Income = GNP
Circular Flow – Interactive Model
https://ajmccarthynz.wordpress.com/2017/05/17/grappling-with-the-concepts-of-the-circular-flow-model/ Prep Task For Monday • Review the slides above – some were used in class, but some are new! Note the link on Slide 1 – have a look! https:// www.tutor2u.net/economics/reference/circular-flow-of-income-and-spending Study pages 160 – 166 in your Book 1 Textbook, making a note of all the key terms and then have a go at the worksheet attached on SMHW. Answer these additional questions: • What is the difference between GDP and GNP and why is this relevant to the Circular Flow of Income? • Using the Circular Flow concept, explain why: National Income ≡ National Output ≡ National Expenditure Ensure your Schedule A Workbook is up to date, up to and including page 5 Be prepared for a short answer test on all concepts covered so far on Tuesday 17th (next week)
Hassan Bougrine (Editor), Louis-Philippe Rochon (Editor) - A Brief History of Economic Thought - From The Mercantilists To The Post-Keynesians-Edward Elgar Publishing (2022)
Hassan Bougrine (Editor), Louis-Philippe Rochon (Editor) - A Brief History of Economic Thought - From The Mercantilists To The Post-Keynesians-Edward Elgar Publishing (2022)
