Transcript ECO 285 The Circular Flow Model

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