Circular flow model

Circular flow model - another economic model

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Interdependence between sectors

Leakages and injections

Circular flow of income

Circular flow model

Index

Circular flow model:

The red arrows shows how the income flows through the economy, and illustrates the interdependence between households and firms.

Circular flow of income:

We are going to expand the model by introducing: the government, the financial sector and the foreign sector.And see how the money moves:

• Government spending: health, education, infrastructure, the maintenance of law and order. Transfer payments (pensions, unemployment benefits and child allowance payments) do not include.
• Investment: the financial sector lends money to firms, which they use to start up or expand their businesses by buying capital,
• Exports: foreign households and firms buy the country's exports, injecting money into the economy.

Injections of money:

• Taxes: some of the income from households and firms goes to the government sector
• Savings: households and firms save some of their income in financial institutions.
• Imports: households and firms spend some of their money on foreign goods and services.

Leakages and injections of money

Leakages of money:

The nature of the circular flow show us that a decision made in any part of the cycle has an impact in all other areas.

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