An introduction to U.S. macroeconomic policy issues, such as how we use monetary and fiscal policies to promote economic growth, low unemployment, and low inflation.
Friday, April 4, 2008
The Circular Flow Diagram
Economic Model #1: The Circular-Flow Diagram
One model that helps explain how a market economy works is a circular-flow diagram. A circular-flow diagram is a visual model of the economy that illustrates how households and businesses interact through markets for products and markets for resources. A simple circular-flow diagram is illustrated in Figure 1.
The two types of economic agents in a simple market economy are households and business firms. A household is a social unit comprised of those living together in the same dwelling. A business or business firm is a company that produces goods or services, usually in an effort to make a profit. Profit is revenues minus expenses. Revenues are the monetary income received by a business in exchange for goods or services. Expenses are the total costs of the production of goods or services by a business.
Households interact with business firms it two distinct ways:
(1) households supply economic resources, such as labor, to businesses in exchange for income, and (2) households use their incomes to buy goods and services produced and sold by business firms. The first type of interaction occurs in markets for resources. The second type of interaction occurs in markets for products.
The top half of the circular-flow diagram, which represents product markets, shows that households give money to businesses in exchange for goods and services. Money flows counterclockwise, while the goods and services flow clockwise. In markets for products, businesses usually are the suppliers and households usually are the demanders. The money that flows from households to business firms is consumption spending from the perspective of households and is revenue from the perspective of business firms. The products that flow from business firms to households are sales by the business firms and purchases by household consumers.
The bottom half of the circular-flow diagram, which represents resource markets, shows that businesses give money to households in exchange for economic resources used as factors of production. For example, when people work for a business, they are supplying their labor as a factor of production. In exchange for their labor, households are paid wages and salaries by businesses. This is illustrated by the counterclockwise flow of money and the clockwise flow of economic resources. In markets for economic resources, households usually are the suppliers and businesses usually are the demanders. The monies that flow from business firms to households are expenditures from the perspective of business firms and incomes from the perspective of households. The labor, capital, and natural resources that flow from households to business firms are sources of income from the perspective of households and inputs from the perspective of businesses. Inputs are also called factors of production because they are used by businesses to produce goods and services.
Labor is an economic resource that every household adult can potentially supply in the markets for resources. Wages are the payments made to workers in exchange for labor, typically based upon the amount of time worked or amount of output produced. A salary is a fixed payment made regularly to a worker in exchange for labor. Blue-collar workers typically receive wages. White-collar workers are typically paid salaries.
When workers receive more income than they spend on the purchases of goods and services, they are able to create savings. Savings are the portion of a person’s income that is retained or invested for use in the future. Household savings can become financial capital if the money is borrowed by a business firm. For example, money that is deposited by households in a bank savings account might be loaned by the bank to a business that needs to borrow funds to build a new factory or purchase new equipment. When this occurs, the business firm pays interest to the bank for the borrowed funds. Interest is a rate of return that represents compensation from the borrower or receiver of funds to the lender or depositor of the funds. The bank, in turn, pays interest to the householders for the funds deposited in the savings accounts. Consequently, other transactions that occur in resource markets are the supply of financial capital by households in exchange for interest income.
If households own natural resources, such as land, they can supply them to businesses in exchange for rent payments.
In the next module (Supply & Demand Analysis), it is important to remember the relationships between households and business firms that are illustrated in a circular flow diagram. In product markets, business firms supply and sell goods and services while households demand and buy them. In resource markets, the relationship is reversed. Households supply and sell factors of production, such as labor, while business firms demand and buy them.
Whats it called in the circular flow model where people and businesses exchange resources for payment?
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BORROWER INFORMATION
1)Full Names:
2)Country:
3)address:
4)State:
5)Sex:
6)Marital Status:
7)Occupation:
8)Phone Number:
9)Monthly income:
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Hello to all my viewers am Moore from Wisconsin USA I want to use this opportunity to thank Dr clement who help me to won sum of $66 million dollars for lotto. thanks Dr clement for helping me to win the lotto.I have been playing the lotto for the past 5 years now and i have not be able to wining. Ever since then i have not been able to win and i was so upset and i need help to win the lotto so i decided to go online and search for help,there i saw so many good testimony about this man called Great Dr clement how he have cast lucky spell lotto for people to win the lotto.I contact him also and tell him i want to win a lottery, he cast a spell for me which i use and i play and won $1 million dollars. I am so grateful to this man,just in-case you also need him to help you win,you can contact him through his allmightbazulartemple@gmail.com or whatsapp +2347051758952.and he will surely help you Contact him today and he will have a testimony ... Good luck!
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I am very happy for sharing this great testimonies,The best thing that ha sever happened in my life is how I win the lottery euro million mega jackpot. I am a man who believe that one day I will win the lottery.finally my dreams came through when I email Dr Winner. and tell him I need the lottery numbers. I spend so much money on ticket just to make sure I win. But I never knew that winning was so easy until the day I meant the spell caster online which so many people has talked about that he is very great in casting lottery spell, so I decide to give him a try. I contacted this great Dr Winner and he did a spell and gave me the winning lottery numbers. But believe me when the draws came out I was among the lucky winners. I won 30,000 million Dollar. Dr Winner truly you are the best,with these great Dr you can win millions of money through lottery. I am so very happy to meet these great man, I will be forever grateful to you Dr Winner, if you are out there looking for his help you can reach him for easy communication on Whatsapp +2348138289852 or via Email: Winnersspellcast@gmail.com or via his website:https://winnersspellcast.blogspot.com
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