The Circular Flow Diagram

979 Words4 Pages
The Circular Flow Diagram The study of circular flow diagram with respect to different sectors and markets Sanjay S Gaikwad Principles of Economics, Micro, BUSA 204, Summer 2013 - 20703 Instructor: Prince A. Covington Sr. June 16, 2013 The Circular Flow Diagram The study of circular flow diagram with respect to different markets Economic Model #1: The Circular-Flow Diagram One model that helps explain how a market economy works is a circular-flow diagram. A circular-flow diagram is a visual model of the economy that illustrates how households and businesses interact through markets for products and markets for resources. A simple circular-flow diagram is illustrated in Figure 1. In particular, the circular flow is a model of the continuous production and consumption interaction among the four major sectors of the macroeconomics--household, business, government, and foreign--using the three macroeconomic markets--product, resource, and financial. The circular flow model provides an easy way of getting the "big picture" and of seeing how the key parts of the macroeconomics fit together. The circular flow model illustrates the interaction among the four macroeconomic sectors--household, business, government, and foreign. These four sectors capture four fundamental macroeconomic functions and their expenditures are combined together to purchase the economy's total production. * Household sector: This includes everyone, all people, seeking to satisfy unlimited wants and needs. This sector is responsible for consumption and undertakes consumption expenditures. It also owns all productive resources. * Business sector: This includes the institutions (especially proprietorships, partnerships, and corporations) that undertake the task of combining resources to produce goods and services. This sector does the production. It also buys capital goods with
Open Document