Circular Flow Model
Published on Nov 22, 2015
Circular Flow Diagram a model to describe economic activity of an economy.
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PRESENTATION OUTLINE
THE CIRCULAR FLOW
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The circular flow diagram also called the circular flow model is perhaps the simplest diagram of economics to understand the activity in the economy
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The circular model shows firstly the relationship between the two decision makers in the economy,the households and firms,and secondly how they interact with one another in two markets,namely in goods and services market and the factor of production market.
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In the goods and services market as the name suggest,is where all products made by firms are exchanged. The factor of production market is where inputs such as land,labour,capital and other resources are exchanged.
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In the factor of production market,households sell and firms buy resources. In the goods and services market,the firms sell and households buy products.
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Households use the incomes they obtain from selling resources to purchase the goods and services produced by the firms,and in the economy there is real flow of resources and products and a flow of incomes and expenditure.
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Thus every transaction has two parties,a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. Finally,both income and expenditure are equal. This is true to all economic activity. This equality of income and expenditure is described with the circular flow model.
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