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Circular Flow Of Economic Activity Essay

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Circular Flow Of Economics Essay, Research Paper

The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government.

Macroeconomics – The study of the aggregate (total) Behavior of the whole economy.

- Unemployment rate: Percent of people in the labor force is not working but searching for work.

- Inflation rate: Percent rise in the average price of all goods and services.

- GDP: Dollar value of all final goods and services produced within a country in a given year; output

A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.

The Forces of supply and demand – In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls.

Supply – The number of products-goods and services that businesses are willing to sell at different prices at a specific time. As price increases, the corresponding quantity supplied increases; as prices fall, the quantity supplied also falls.

Equilibrium Price – The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

The United States and the economy –

The United States has the most powerful, diverse, and technological advanced economy in the world. Oriented economy, private individuals, and business firms make most of th decisions. Government purchases of goods and services are made predominantly in the marketplace. US business firms have greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products. In all economic sectors, US firms are at or near the forefront in technological advances, especially in computers, medical equipment, and aerospace, although their advantage has steadily narrowed since the end of World War 2. The excelled technology explains the gradual development of a ” two – tie labor market” in which those at the bottom lack the education and professional / technical skills of those at the top and, fail to get pay raises, health insurance coverage, and other benefits.

The circular flow – The continuous movement of production, income, and resources between producers and consumers. This flow moves through product markets, as the gross domestic product of our economy and is the revenue received by businesses in payment for this production. The flow of revenue flows to resource markets as payments by businesses for the resources employed in production. The payment received by resource owners is income. Resource owners use this income to purchase goods and services through the product markets. This flow can be altered in a number of different ways, especially by government. Taxes are sliced by income, wages, profit, etc. but are then used for expenditures by government on other things bought through the product markets. Consumers also divert a portion of their income into saving, which is then used to finance the federal deficit or business investment. For every buyer there is a seller, The seller receives what the buyer buys, The buyer gives money for goods and the seller gives goods for money.

National income is the total value of all factor payments during a period of time. Thenational income is a measure of the total economic flow through the factor marker. Gross national product should equal the national income. GDP is the total market value of all final goods and services produced during a given period and time within the nations borders. Gross domestic product is the most common measure of the level of economic activity at the national level.

Households own the economy’s resources ( Factors of production; land, labor, and capital) whose services they rent or sell to firms or businesses through factor markets in exchange for factor payments (rental payments, wage payments, interest, and profits). Households use their factor income to purchase goods and services, capital goods. Households also use part of their factor income to pay government taxes.

75% of national income is received as wages and salaries. Part of the income goes to the government as personal taxes, and the rest is divided between personal consumption expenditures and personal saving. Economists define saving as ” the part of after-tax income which is not consumed.” Households have two choices with their income after taxes, to consume or save. The desire or willingness to save depends on the size of your income, if your income is low, you may dissave. Saving and consumption vary directly with income, as the households get more income, they divide it between saving and consumption.

Households offer labor service as a factor of production and businesses repay them with income or salaries. The fact that households consume a certain portion of total income, does not guarantee they will consume the proportion of any change in income they might receive. The proportion or fraction, of any change in income consumed is called the marginal propensity to consume. MPC is the change in consumption divided by the change in income. The marginal propensity to save, MPS is the ratio of change in saving to the change in income. The sum of MPC and MPS for any change in disposable income must always be one. As households save a portion of their income into the

financial market, the financial market distributes to households interest accrued on the money saved. The financial market is a market that trades financial assets. Financial assets are the legal claims on the real assets in our economy including corporate stocks and bonds, government securities, and money. Without financial markets it would be impossible to accumulate the funds needed for investment in capital projects. Firms or businesses employ factors of production, which they obtain from households through the factor markets in exchange for factor payments. They use factors to produce goods and services, which are sold to households and the government sector through the goods and services markets. The revenue from these sales goes to households as factor payments or to the government as taxes. The government sector purchases output from firms through the goods and services markets, financing these purchases by tax collections.

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Circular Flow Of Economics Essay Research Paper

Circular Flow Of Economics Essay, Research Paper

The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government.

Macroeconomics – The study of the aggregate (total) Behavior of the whole economy.

- Unemployment rate: Percent of people in the labor force is not working but searching for work.

- Inflation rate: Percent rise in the average price of all goods and services.

- GDP: Dollar value of all final goods and services produced within a country in a given year; output

A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.

The Forces of supply and demand – In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls.

Supply – The number of products-goods and services that businesses are willing to sell at different prices at a specific time. As price increases, the corresponding quantity supplied increases; as prices fall, the quantity supplied also falls.

Equilibrium Price – The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

The United States and the economy –

The United States has the most powerful, diverse, and technological advanced economy in the world. Oriented economy, private individuals, and business firms make most of th decisions. Government purchases of goods and services are made predominantly in the marketplace. US business firms have greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products. In all economic sectors, US firms are at or near the forefront in technological advances, especially in computers, medical equipment, and aerospace, although their advantage has steadily narrowed since the end of World War 2. The excelled technology explains the gradual development of a ” two – tie labor market” in which those at the bottom lack the education and professional / technical skills of those at the top and, fail to get pay raises, health insurance coverage, and other benefits.

The circular flow – The continuous movement of production, income, and resources between producers and consumers. This flow moves through product markets, as the gross domestic product of our economy and is the revenue received by businesses in payment for this production. The flow of revenue flows to resource markets as payments by businesses for the resources employed in production. The payment received by resource owners is income. Resource owners use this income to purchase goods and services through the product markets. This flow can be altered in a number of different ways, especially by government. Taxes are sliced by income, wages, profit, etc. but are then used for expenditures by government on other things bought through the product markets. Consumers also divert a portion of their income into saving, which is then used to finance the federal deficit or business investment. For every buyer there is a seller, The seller receives what the buyer buys, The buyer gives money for goods and the seller gives goods for money.

National income is the total value of all factor payments during a period of time. Thenational income is a measure of the total economic flow through the factor marker. Gross national product should equal the national income. GDP is the total market value of all final goods and services produced during a given period and time within the nations borders. Gross domestic product is the most common measure of the level of economic activity at the national level.

Households own the economy’s resources ( Factors of production; land, labor, and capital) whose services they rent or sell to firms or businesses through factor markets in exchange for factor payments (rental payments, wage payments, interest, and profits). Households use their factor income to purchase goods and services, capital goods. Households also use part of their factor income to pay government taxes.

75% of national income is received as wages and salaries. Part of the income goes to the government as personal taxes, and the rest is divided between personal consumption expenditures and personal saving. Economists define saving as ” the part of after-tax income which is not consumed.” Households have two choices with their income after taxes, to consume or save. The desire or willingness to save depends on the size of your income, if your income is low, you may dissave. Saving and consumption vary directly with income, as the households get more income, they divide it between saving and consumption.

Households offer labor service as a factor of production and businesses repay them with income or salaries. The fact that households consume a certain portion of total income, does not guarantee they will consume the proportion of any change in income they might receive. The proportion or fraction, of any change in income consumed is called the marginal propensity to consume. MPC is the change in consumption divided by the change in income. The marginal propensity to save, MPS is the ratio of change in saving to the change in income. The sum of MPC and MPS for any change in disposable income must always be one. As households save a portion of their income into the

financial market, the financial market distributes to households interest accrued on the money saved. The financial market is a market that trades financial assets. Financial assets are the legal claims on the real assets in our economy including corporate stocks and bonds, government securities, and money. Without financial markets it would be impossible to accumulate the funds needed for investment in capital projects. Firms or businesses employ factors of production, which they obtain from households through the factor markets in exchange for factor payments. They use factors to produce goods and services, which are sold to households and the government sector through the goods and services markets. The revenue from these sales goes to households as factor payments or to the government as taxes. The government sector purchases output from firms through the goods and services markets, financing these purchases by tax collections.

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Circular Flow Of Economics Essay, Research Paper

The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government.

Macroeconomics – The study of the aggregate (total) Behavior of the whole economy.

— Unemployment rate: Percent of people in the labor force is not working but searching for work.

— Inflation rate: Percent rise in the average price of all goods and services.

— GDP: Dollar value of all final goods and services produced within a country in a given year; output

A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.

The Forces of supply and demand – In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls.

Supply – The number of products-goods and services that businesses are willing to sell at different prices at a specific time. As price increases, the corresponding quantity supplied increases; as prices fall, the quantity supplied also falls.

Equilibrium Price – The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

The United States and the economy –

The United States has the most powerful, diverse, and technological advanced economy in the world. Oriented economy, private individuals, and business firms make most of th decisions. Government purchases of goods and services are made predominantly in the marketplace. US business firms have greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products. In all economic sectors, US firms are at or near the forefront in technological advances, especially in computers, medical equipment, and aerospace, although their advantage has steadily narrowed since the end of World War 2. The excelled technology explains the gradual development of a ” two – tie labor market” in which those at the bottom lack the education and professional / technical skills of those at the top and, fail to get pay raises, health insurance coverage, and other benefits.

The circular flow – The continuous movement of production, income, and resources between producers and consumers. This flow moves through product markets, as the gross domestic product of our economy and is the revenue received by businesses in payment for this production. The flow of revenue flows to resource markets as payments by businesses for the resources employed in production. The payment received by resource owners is income. Resource owners use this income to purchase goods and services through the product markets. This flow can be altered in a number of different ways, especially by government. Taxes are sliced by income, wages, profit, etc. but are then used for expenditures by government on other things bought through the product markets. Consumers also divert a portion of their income into saving, which is then used to finance the federal deficit or business investment. For every buyer there is a seller, The seller receives what the buyer buys, The buyer gives money for goods and the seller gives goods for money.

National income is the total value of all factor payments during a period of time. Thenational income is a measure of the total economic flow through the factor marker. Gross national product should equal the national income. GDP is the total market value of all final goods and services produced during a given period and time within the nations borders. Gross domestic product is the most common measure of the level of economic activity at the national level.

Households own the economy’s resources ( Factors of production; land, labor, and capital) whose services they rent or sell to firms or businesses through factor markets in exchange for factor payments (rental payments, wage payments, interest, and profits). Households use their factor income to purchase goods and services, capital goods. Households also use part of their factor income to pay government taxes.

75% of national income is received as wages and salaries. Part of the income goes to the government as personal taxes, and the rest is divided between personal consumption expenditures and personal saving. Economists define saving as ” the part of after-tax income which is not consumed.” Households have two choices with their income after taxes, to consume or save. The desire or willingness to save depends on the size of your income, if your income is low, you may dissave. Saving and consumption vary directly with income, as the households get more income, they divide it between saving and consumption.

Households offer labor service as a factor of production and businesses repay them with income or salaries. The fact that households consume a certain portion of total income, does not guarantee they will consume the proportion of any change in income they might receive. The proportion or fraction, of any change in income consumed is called the marginal propensity to consume. MPC is the change in consumption divided by the change in income. The marginal propensity to save, MPS is the ratio of change in saving to the change in income. The sum of MPC and MPS for any change in disposable income must always be one. As households save a portion of their income into the

financial market, the financial market distributes to households interest accrued on the money saved. The financial market is a market that trades financial assets. Financial assets are the legal claims on the real assets in our economy including corporate stocks and bonds, government securities, and money. Without financial markets it would be impossible to accumulate the funds needed for investment in capital projects. Firms or businesses employ factors of production, which they obtain from households through the factor markets in exchange for factor payments. They use factors to produce goods and services, which are sold to households and the government sector through the goods and services markets. The revenue from these sales goes to households as factor payments or to the government as taxes. The government sector purchases output from firms through the goods and services markets, financing these purchases by tax collections.

Circular flow of economic activity essay

Uses of Possibility Curve, The Circular Flow of Economic Activity


Methods of scientific study

We can ascertain the level of unemployment and underemployment involved in the production with the help of this curve. It helps in giving more output with the availability of resources. Economic growth is monitored along with the production growth. It helps in allocating future resources based on the present trend involved in the production activity. Economic efficiency is possible since efficient selection of the product is carried out along with the efficient allocation of resources and efficient allotment of products produced for the consumers.


The Circular Flow of Economic Activity

Economic problem is that the scarcity which is resolved by three institutions and they are (i) House hold, (ii) Firms and (iii) Government. These are keenly involved in three fiscal activities of production, consumption and trade of commodities. The decision makers perform in such a way that all economic activities move in a circular form. There are two-sector, three-sector and four-sector economy circle in which two-sector implies simplified economy which include household and firms, three-sector flow consists of moderate economy which includes government's taxes and expenditure. Four-Sector flow consists of all that is dealt with the above sectors and includes foreign sector. We are going to see the four-sector circular flow which comprises of all the sectarian types.


Circular Flow in a Four Sector Economy

Exports are the inflows in the circular flow of economy and hence it plays an important role. The inflows, outflows of household, business firm and government sectors are in relation to the foreign sector. The household sector buys products from abroad and compensates for them. On the other hand, business firm exports products to foreign countries and its receipts are in the circular flow. Likewise business firm pays for the import which has made for the capital goods, machinery, raw materials, and consumer goods to the foreign sector from overseas. For all the exports and imports made, government receives payments in the form of duties. Hence all the four sectors are inter-related in the circular flow. The circular flow will look like the following.


The imports, exports and transfer of payments arise from the other three domestic sectors of the household, firm and government. The outflows and inflows from the foreign sectors are termed as "Balance of Payments Sectors".


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The Circular Flow

The flow of payments in an economy is a circular flow. Individuals--people living in households--work for businesses, rent their property (or their capital) to businesses, and manage and own the busineses. All these activities generate incomes--flows of payments from businesses to households. But households then spend their incomes--on consumption goods, in taxes paid to governments (that then spend the money on goods and services), and on assets like stock certificates and bank CDs that flow through the financial sector and are then used to buy investment and other goods. All these are expenditures

The two flows--of incomes and of expenditures--are equal: all expenditures on products are ultimately someone's income, and every piece of total income is also expended in some way.

Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

Circular Flow Of Economics Essay Research Paper

Circular Flow Of Economics Essay Research Paper

Circular Flow Of Economics Essay, Research Paper The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government. Macroeconomics – The study of the aggregate (total) Behavior of the whole economy. Macroeconomics Aggregates: - Unemployment rate: Percent of people in the labor force is not working but searching for work. - Inflation rate: Percent rise in the average price of all goods and services. - GDP: Dollar value of all final goods and services produced within a country in a given year;

output A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services. The Forces of supply and demand – In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls. Supply – The number of products-goods and services that businesses are willing to sell at different prices at a specific time. As

price increases, the corresponding quantity supplied increases; as prices fall, the quantity supplied also falls. Equilibrium Price – The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time. The United States and the economy – The United States has the most powerful, diverse, and technological advanced economy in the world. Oriented economy, private individuals, and business firms make most of th decisions. Government purchases of goods and services are made predominantly in the marketplace. US business firms have greater flexibility than their counterparts in Western Europe

and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products. In all economic sectors, US firms are at or near the forefront in technological advances, especially in computers, medical equipment, and aerospace, although their advantage has steadily narrowed since the end of World War 2. The excelled technology explains the gradual development of a ” two – tie labor market” in which those at the bottom lack the education and professional / technical skills of those at the top and, fail to get pay raises, health insurance coverage, and other benefits. The circular flow – The continuous movement of production, income, and resources between producers and consumers. This flow moves through product markets, as the gross domestic product of

our economy and is the revenue received by businesses in payment for this production. The flow of revenue flows to resource markets as payments by businesses for the resources employed in production. The payment received by resource owners is income. Resource owners use this income to purchase goods and services through the product markets. This flow can be altered in a number of different ways, especially by government. Taxes are sliced by income, wages, profit, etc. but are then used for expenditures by government on other things bought through the product markets. Consumers also divert a portion of their income into saving, which is then used to finance the federal deficit or business investment. For every buyer there is a seller, The seller receives what the buyer buys, The

Circular Flow of Economic Activity – FREE Circular Flow of Economic Activity information

Circular Flow of Economic Activity CIRCULAR FLOW OF ECONOMIC ACTIVITY

The basic tenet of the circular flow of economic activity is, "What goes around comes around." The circular flow begins with the spending habits of consumers. How much and how fast consumers spend then drives the amount of investments that businesses make in resources to produce goods. These investments in turn affect the number of jobs that are available and the general economic health of a region. As more jobs become available, consumers have more money to spend. Conversely, as employment levels drop, consumers have less money to spend on goods and services. Consumer spending also determines the kinds and quantities of products that businesses produce.

The circular flow theory was first advanced by the physiocrats, a school of economics in the 1700s. The major proponent of the physiocratic view, Francois Quesnay (1694 – 1774), wrote in 1758 that the circular flow was a natural order in economics and self-sustaining. Quesnay proposed that the flow had an inherent self-correcting mechanism and therefore did not need to be directed by government. The circular flow created a balance by automatically decreasing and increasing consumer spending levels and business investments when needed.

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Circular Flow of Economic Activity (Two Sector Model)

Circular Flow of Economic Activity (Two Sector Model)

In an economy exist different sectors like household sector, business firms, government sector etc.

Here in a two sector model economy, we assume that there are only two sectors in an economy. I.e. household sector and business sector. In a two sector economy we assume and analyze the activities of these two sectors. The important assumption of this theory is that, there is no government, so here we can’t see any actions apart from others.

For simplifying the theory we can analyze interventions of these two sectors with the diagram.

In the diagram showing the interactions between the household sector and business sector. In the household sector includes common people/ consumers like laborers, investors, lessee etc. In the business sector includes firms or business organizations and their major function is to produce goods and services.

Now we can examine their interventions. Mainly there are four interactions or contacts happening. Each transaction is shortly explained below.

Firstly, the household sector supply their factors of production or factor services (labor, land, capital. ) to the business sector through the factor market.

Secondly the business sector pays the rewards to household sector for their contribution to the production in kinds of rent for land, interest for capital, and wages for laborers…

Thirdly business sector supply their outputs or goods and services in the goods or product market.

Fourthly household sector pays their income for consumption expenditure.

Here we saw product market and factor market. Factor market refers to the market for selling and purchasing or hiring of factors of production like labor, land …

And the product market means the market in which the goods and services are supplying and demanding.

In the factor market household sector is the supplier and business sector is the demanders of factors of production or factor services. In the product market or goods market business sector is the supplies and household sector is the demanders of output or goods and services.

In the diagram the inner arrows shows monitory flow or financial flow and the outer arrow shows the real flow or production flow.

Circular flow of economic activity – household savings

In an economy, the above discussed activities may not happen exactly. There is a exception, that is the concept of savings by the household sector. When we analyze the consumer behavior, the consumers spend their incomes for consumption and savings. So, the savings by the household sector influence, like reducing the output of the economy. Because households save their incomes will be effected in reducing the demand for consumption goods. So, it reduces the employment also. Anyway in reality a portion of the savings gradually converted in to investment. Some savers invest in fixed assets, it help the economy for capital formation. Further a portion of savings reached at financial market and converted in to investment by financial institutions like banks.

See the figure – II understand the changes due to savings by the household sector.