circular flow

Examples of circular flow in the following topics:

• The Circular Flow Model

  • The basic circular flow model consists of two sectors that determine income, expenditure, and output.
  • The factor owners spend the income on goods which leads to the circular flow of payments .
  • This circular flow is ongoing between households and firms.
  • The circular flow model shows the flow of payments between households and firms.
  • State the function of the circular flow diagram and the production possibilities frontier

• The Circular Flow and GDP

  • In economics, the "circular flow" diagram is a simple explanatory tool of how the major elements in an economy interact with one another.
  • The continuous flow of production, income and expenditure is known as circular flow of income.
  • The circular flow involves two basic assumptions:
  • Goods and services flow in one direction and money payment flow in the opposite or return direction, causing a circular flow.
  • The circular flow is a simplified view of the economy that provides an ability to assess GDP at a specific point in time.

• The Magic of the Economy

  • The complexity of the dynamics of human motivation and systems has led to the establishment of assumptions that form the basis of the theory of consumer and firm behavior, both of which are used to model circular flow interactions within the economy .
  • An understanding of how wages and consumption flow between consumers and producers provides agents with an ability to understand the symbiosis of the relationship rather than fixating on the contentious components that surface from time to time.
  • An understanding of the ebb and flow of the economy through the boom and bust of the business cycles, creates the potential for emotional balance by reminding agents to limit desperation in downturns and exuberance in expansions.
  • For example, the circular flow diagram displays the economic framework related to the dynamic interconnectedness of economic agents.
  • In the graph above the display is limited to households and firms but other depictions of circular flow incorporate the government and international trading partners.

• Defining Macroeconomics

  • Macroeconomics simplifies the complexities of the trading activities in an economy by distilling actions to primary participants and tracing the circular flow of activity between them.

• Full Economy Interactions

• Production

  • In the circular flow diagram found in most principles of economics texts, production takes place in a "firm" or "business."

• Economic Way of Thinking

  • Quesnay recognized the idea of a flow or circular flow of goods and money in the tableau.

• The Financial Account

  • The financial account has four components: foreign direct investment, portfolio investment, other investment, and reserve account flows.
  • If foreigners are investing in a country, that is an inbound flow and counts as a surplus item on the financial account.
  • If a nation's citizens are investing in foreign countries, there is an outbound flow that will count as a deficit.
  • Other investment includes capital flows into bank accounts or provided as loans.
  • Inbound capital flows (from sales of the account's foreign currency), especially when combined with a current account surplus, can cause a rise in value (appreciation) of a nation's currency, while outbound flows can cause a fall in value (depreciation).

• Institutions, Markets, and Intermediaries

  • A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities.
  • A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers).

• The Capital Account

  • Under the International Monetary Fund (IMF) definition, however, most of these asset flows are captured in the financial account.
  • Like the financial account, a deficit in the capital account means that money is flowing out of a country and the country is accumulating foreign assets.
  • Likewise, a surplus in the capital account means that a money is flowing into a country and the country is selling (or otherwise disposing of) non-produced, non-financial assets.