Download In economics, the "circular flow" diagram is a simple

In economics, the "circular flow" diagram is a simple explanatory tool
of how the major elements in an economy interact with one another.
LEARNING OBJECTIVE [ edit ]
Evaluate the effect of the circular flow on GDP
KEY POINTS [ edit ]
In the circular flow model, the household sector, provides various factors of production such
as labor and capital, to producers who in turn produce goods and services.
Firms provide consumers with goods and services in exchange for consumer expenditure and
"factors of production" from households.
Investment is equal to savings and is the income not spent but available to both consumers and
firms for the purchase of capital investments, such as buildings, factories and homes.
A portion of income is also allocated to taxes (income is taxed and the remaining is either
consumed and or saved);government spending, G, is based on the tax revenue, T.
The continuous flow of production, income and expenditure is known as circular flow of income;
it is circular because it has neither any beginning nor an end.
TERMS [ edit ]
Factors of production
In economics, factors of production are inputs. They may also refer specifically to the primary
factors, which are stocks including land, labor, and capital goods applied to production. circular flow
A model of market economy that shows the flow of dollars between households and firms.
Give us feedback on this content: FULL TEXT [edit ]
In economics, the "circular flow" diagram is a simple explanatory tool of how the major
elements as defined by the equation Y
= Consumption + Investment +
Government Spending + (Exports Imports). interact with one another.
Circular flow is basically a continuous loop
that for any point and time yields the value
"Y" otherwise defined as the sum of final
good and services in an economy, or gross
domestic product (GDP) .
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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.
In the circular flow model, the household sector, provides various factors of production such
as labor and capital, to producers who in turn produce goods and services. Firms compensate
households for resource utilized and households pay for goods and services purchased from
firms. This portion of the circular flow contributes to expenditures on consumption, C and
generates income, which is the basis for savings (equal to investment) and government
spending (tax revenue generated from income).
Investment, I, is equal to savings and is the income not spent but available to both consumers
and firms for the purchase of capital investments, such as buildings, factories and homes. I
represents an expenditure on investment capital.
Income generated in the relationship between firms and households is taxed and the
remaining is either consumed and or saved. Government spending, G, is based on the tax
revenue, T. G can be equal to taxes, less than or more than the tax revenue and represents
government expenditure in the economy.
Finally, exports minus imports, X - M, references whether an economy is a net importer or
exporter (or potentially tradeneutral (X - M = 0)) and the impact of this component on
overall GDP. Note that if the country is a net importer the value of X - M will be negative and
will have a downward impact to overall GDP; if the country is a net exporter, the opposite will
be true. Circular flow
The continuous flow of production, income and expenditure is known as circular flow of
income. It is circular because it has neither any beginning nor an end. The circular flow
involves two basic assumptions: 1. In any exchange process, the seller or producer receives what the buyer or consumer
spends. 2. Goods and services flow in one direction and money payment flow in the opposite or
return direction, causing a circular flow.