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ECO 285 The Circular Flow Model Dr. Dennis Foster – Spring 2014 Additional References • Wikipedia on the Circular Flow of Income • St. Louis Fed video • The circular flow model critiqued • YouTube video CF I – 2 sectors & no saving Consumption Expenditures Goods and Services Businesses (Bus) Households (HH) Factor “rental” – land, labor, capital Income to factors Real flows. Money flows. CF II – 2 sectors & saving Consumption Expenditures Goods and Services Saving Households (HH) Investment Financial Intermediaries Businesses (Bus) Factor “rental” – land, labor, capital Income to factors Real flows. Money flows. CF II* – 2 sectors & saving Consumption Expenditures Goods and Services Saving Households (HH) Investment Financial Intermediaries Factor “rental” – land, labor, capital Businesses (Bus) I Investment Goods Income to factors Real flows. Money flows. CF III – 3 sectors & saving Gov’t. Taxes Government Expenditures Gov’t. G & S C Goods and Services Saving Households (HH) Investment Financial Intermediaries Factor “rental” – land, labor, capital Businesses (Bus) I Investment Goods Income to factors Real flows. Money flows. CF III – money flows only Gov’t. Taxes Government Expenditures C Saving Households (HH) Investment Financial Intermediaries Businesses (Bus) I Income to factors Money flows. CF IV – 4 sectors; money flows Gov’t. Taxes Government Expenditures C Imports Foreign Sector Exports Households (HH) Saving Financial Intermediaries Income to factors Businesses (Bus) I Investment Imports spending Exports spending Money flows. Why the Circular Flow Model? 1. To show how the different sectors of the economy interact with one another. 2. To measure the level of economic activity. --Can’t measure physical flows. --Can measure money flows. --Can measure expenditures or income. GDP & Data • GDP = Income = C + I + G +(Ex-Im) • NBER business cycle page • FRED recession graph • Economic Report of the President ECO 285 The Circular Flow Model Dr. Dennis Foster – Spring 2014
