- #CIRCULAR FLOW DIAGRAM ECONOMICS DEFINITION CODE#
- #CIRCULAR FLOW DIAGRAM ECONOMICS DEFINITION PLUS#
- #CIRCULAR FLOW DIAGRAM ECONOMICS DEFINITION FREE#
Even though this partly goes to pay themselves and their bureaucracy, as well as funding schools and hospitals, it finds its way back into the flow. It taxes us, T, and uses this money to finance its spending. In almost all economies, the government plays an active part. Try drawing a circular flow for a 2-sector closed economy and then click on 2-CLOSED to check your answer. If it did not trade outside of itself, we would call it a 2-sector, closed economy. We called the economy illustrated in Figure 3 an open economy because it is open to trade with the outside world. This starts to show us some possible policies to promote growth - policies that help boost exports or investment will lead to more injections into the circular flow and therefore boost national income. If the leakages are greater than the injections then national income will fall, while if injections are greater than leakages national income will rise. The flow will be balanced and therefore in equilibrium when the injections are equal to the leakages. The effect of these leakages can be seen in Figure 2.Īn injection is any expenditure not originating in the household sector, including investment, government spending and exports.įigure 3 Circular flow - two sector, open economy S and M are called leakages from the circular flow.
#CIRCULAR FLOW DIAGRAM ECONOMICS DEFINITION CODE#
It is given the code ' M' for imports.įigure 2 Circular flow - savings and imports
The money to buy these goods and services flows out of the country. Other money is used to buy goods or services produced overseas. Domestic consumption is given the code ' C'.
#CIRCULAR FLOW DIAGRAM ECONOMICS DEFINITION PLUS#
Economists call the wages plus the other forms of income, national income and give it the code ' Y'. In the meantime, households spend this income on goods and services (in the goods market) and in exchange receive the goods and services themselves (the right hand side of the flow). Households sell their factor services to firms (in the factor markets) and in exchange receive wages (the left hand side of the flow). We can see this circular flow in Figure 1. This money is spent on food, clothing, transport, entertainment etc, and so it returns to the firms. On the scale of the whole economy, this is known as national income - the total amount of income earned over a given time period. People in households work for firms (selling their factor services) and receive wages in exchange.
#CIRCULAR FLOW DIAGRAM ECONOMICS DEFINITION FREE#
These flows are part of the fundamental process of satisfying human wants.Īs we have already seen, a free market economy consists of two components, or sectors, as they are called. The circular flow of income is a way of representing the flows of money between the two main groups in society - producers (firms) and consumers (households). Section 3.6 Distribution of income - questions.Section 3.6 Distribution of income - notes.Section 3.5 Unemployment and inflation - simulations and activities.Section 3.5 Unemployment and inflation - in the news.Section 3.5 Unemployment and inflation - questions.Section 3.5 Unemployment and inflation - notes.Section 3.4 Demand-side and supply-side policies - in the news.Section 3.4 Demand-side and supply-side policies - questions.Section 3.4 Demand-side and supply-side policies - notes.Section 3.3 Macroeconomic models - simulations and activities.Section 3.3 Macroeconomic models - questions.Section 3.3 Macroeconomic models - notes.Section 3.2 An introduction to development - in the news.Section 3.2 An introduction to development - questions.Section 3.1 Introduction to development - notes.Section 3.1 Measuring national income - questions.Section 3.1 Measuring national income - notes.Topic pack - Macroeconomics - introduction.
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