Scribd
Upload
38 views9 pages

Topic 4 - The Circular Flow

The circular flow diagram shows the main participants and markets in an economy and how money flows between them. It identifies households, firms, government, and the foreign sector and how they interact in the product market and factor market. The circular flow model illustrates how gross domestic product is calculated by tracking the flows of goods, services, and money between these economic actors.

Uploaded by

rethabilehasanemail
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
38 views9 pages

Topic 4 - The Circular Flow

The circular flow diagram shows the main participants and markets in an economy and how money flows between them. It identifies households, firms, government, and the foreign sector and how they interact in the product market and factor market. The circular flow model illustrates how gross domestic product is calculated by tracking the flows of goods, services, and money between these economic actors.

Uploaded by

rethabilehasanemail
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 9

THE CIRCULAR FLOW

CIRCULAR FLOW

Circular Flow
• The circular flow is a diagrammatic representation of
economic activity in a given time period.
• It identifies the main sectors in the economy and shows
connections between different participants in an economy i.e.
households, firms, the government and foreign sector and the
links between the different parts.
• The circular flow shows how national income or Gross
Domestic Product is calculated.
CIRCULAR FLOW: PRODUCT MARKET &
FACTOR/ RESOURCE MARKET

(Source: https://www.frbatlanta.org/education/classroom-economist/infographics/circular-flow.aspx)
OPEN ECONOMIC FLOW MODEL

Income Consumption Spending


Households
Production Factors Goods & Services

services
Goods &

Tax
Factor services Goods & Services Goods
Factor
market Government market
Spending Spending
services
Goods &

Production factors Tax


Goods & Services
Producers/Firms
Factor income Income
Imports

Exports

Income
Tax

Monetary Flow

Real Flow Foreign Sector


MONEY AND REAL FLOWS

• Monetary or money flows occur between the different


markets and participants and consist of income, spending and
taxation.
• Real flows consist of goods and services, and production
factors, between markets and participants.
• Real flows move in the opposite direction to money flows.
• Economists are interested in money flows.
PARTICIPANTS IN THE CIRCULAR FLOW

1. Consumers (Households)
2. Producers (Firms)
3. Government (Public sector)
4. Foreign sector
MARKETS IN THE CIRCULAR FLOW

• Factor markets: are where factors of production are traded.


• Goods or products markets: are where goods & services are
traded.
NATIONAL ACCOUNTING AGGREGATES

Gross Domestic Product is:


• The total value of
• Final goods and services
• Produced within the borders of a country
• In a specific period of time, usually 1 year

You might also like