Clearly discuss the concept of the circular for 2-sector, 3-sector and 4-sector economies.
ECN 002 (1-12-2021–Online Discussion/Quiz–1–Circular Flow of Income)
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Dr Anthony Orji
Senior Lecturer, Economics, UNN
Dr Anthony Orji is a Ph.D holder in Economics and a lecturer at the Department of Economics, University of Nigeria Nsukka.
He obtained his B.Sc, Msc and Ph.D Degrees from the University of Nigeria, Nsukka and a Post Graduate Diploma in Sustainable Local Economic Development (SLED) from Erasmus University, Rotterdam Netherlands.
1. The difference between the money put in a bank account each payday and the stock of money indicated by the balance in ur passbook simply is, the money put in the bank account each payday is calculated over an interval of time but the stock of money indicated by the balance in passbook is calculated once a specific time and explains the quantity at that point in time which might have been gathered in the past.
2. In the real world, the savers are those who give their money to someone else to control (usually a bank) deciding not to learn what will and what will not make them gain more while the investors on the other hand, are those who sacrifice portion of their money into mutual funds and business deals in hopes of gaining returns
4. If there was no money in the system, households would trade factors of productions to the firm for goods and services and vice versa
5.
1)The difference between the money put into the bank account each payday and the stock of money Indicated by the balance in our passbook is that the money we actually put in the bank account is savings while the stock of money Indicated by the balance in our pass book is our investment
1b)Flows are measured per unit of time
Stocks are measured at a specific time,and represent a quantity existing at a point in time
So the similarities are that both stocks and flows are measured
1c) Flows are measured per unit ,for example naira per month, gallons of water per minute or kilometers travelled per hour
Stocks are measured at one specific time and represent a quantity existing at that point in time which may have accumulated in the past
2). Savers are people who set aside a considerably smaller amount of money in comparison to their income,,these people are mainly domestic households.
Investors is a person or firm that allocate capital with the expectation of receiving financial return or to gain merit
4) normally,money flows from producers to worker’s as wages,and flows back to producers as payment,so if there is no money in the circular flow system it will result to a nation gross domestic product or the national income
5) when the unemployed workers gets into the circular flow there will be an increase in money in the circular flow of income as more people are now receiving wages , this increase in income will lead to increase in consumption as there is also increase in demand for goods and services produced by the firm
B)The flows connected to them (unemployed)are the firm’s
1i) A stock is measured at one specific time and reprents a quantity existing at the point in time (say, December 31,2004), which may have accumulated in past. A flow variable is measured over an interval of time . Therefore, a flow would be measured per unit of time (say a year).
1ii) Generally, most economics variables that are studied are catergorised either as stock or Flow variable. Stock refers to any quantity that is measured at a particular point in time,while flow is referred to as the quantity that a be measured over a period of time.
2) Saving is setting aside money you don’t spend now for emergencies or for a future purchase. It’s money you want to be able to access quickly, with little or no risk, and with the least amount of taxes. Financial institutions offer a number of different savings options.
Investing is buying assets such as stocks, bonds, mutual funds or real estate with the expectation that your investment will make money for you. Investments usually are selected to achieve long-term goals. Generally speaking, investments can be categorized as income investments or growth investment.
4) The circular flow model demonstrates how money moves through society. Money flows from producers to workers as wages and flows back to producers as payment for products. In short, an economy is an endless circular flow of money.
That is the basic form of the model, but actual money flows are more complicated. Economists have added in more factors to better depict complex modern economies. These factors are the components of a nation’s gross domestic product (GDP) or national income. For that reason, the model is also referred to as the circular flow of income model.
5)Due to the decline in unemployment between 2013 and 2015, more people are now receiving wages, which will increase money in the circular flow of income. As a result of this increase in income, firms will be able to produce more goods and services, which will result in an increase in consumption.
1)the difference between the money put into account each payday and the stock of money indicated by the balance in a passbook is that while the payday is inform of savings which takes place on a daily, the stock of money is in form of investment which has the total balance of income and it is mostly calculated yearly.
2)in a real world the savers are the households while the investors are the firms
4) the circular flow of income will change in the diagram from wages to goods and services because by the time the households work for the firm they in return pay them in return of labour with goods supply
5) the unemployed workers are under the households in the diagram of circular flow because the households in the diagram comprises of of both the employed and unemployed which is equally found the the circular flow of income
1)The money we put into our bank each account each payday is known as flow because a flow variable is measured over an interval of time, Therefore a flow would be measured per unit of time.while a stock is measured at one specific time and represents a quantity existing at that point in time which may have accumulated in the past.
2) A saver is someone who gives their money to someone else to control elimating opportunities to learn for themselves what will and will not make more money.
An investor are the type of people who use financial advisors to play the market for them and turning a portion of their money over to be invested in mutual funds and stock equities in hope of gaining a nice return.
4) Circular flow model demonstrate how money moves through society , if there is no money in the system the circular flow will only be clockwise since the counter flow signifies money payment, Hence house hold will only provide factor services for the firm in exchange for the goods the firm produces.
5)since they are unemployed they cannot render factor services,hence the flow would only be between the unemployed in the household and the product market
The money I put into my account each payday it is called direct deposit. The term direct deposit refers to the deposit of funds electronically into a bank account rather than through a physical,paycheck. The stock of money indicated by the balance in your passbook is the amount remaining in my account is the amount remaining after total expenditure.
(I) Flow is variable is measured over an interval of time. Therefore, a flow would be measured per unit of time (a year). While stock is measured at one specific time and represents a quantity existing at that point in time. ( December 31, 2002) which may have accumulated in the past.
(II) Flow is measured per year. While stock may have accumulated goods in the past.
(2) Financial market are the savers
Firms are the investors.
(4) There will be scarcity of goods and services in the economy. It’s will make the economy borrow from other countries.
(5) The unemployed workers are the households they work in factor market. Which the factor market pay them as factor service. In the circular flow of income. Household and firms are connected to them
(1)the different between the money you put into your account and each pay day and the stock of money indicated by balance in your pass book is that the money you put into account flow from your the owner to the bank while it been saved and stock at the balance because the money is being save and it can not move from the bank where it is been stock that is to say it flow from the owner and stock at the bank.
(2)in the real world the savers are the people that we borrow money from to invest such as Bank, while the investors are the people that allocates capital with the expectation of a future financial return or gain an advantage.
(4) that means that the house hold have to take there good to the factor market where they could exchange there good with the firm
(5) the unemployed can be fixed in to circular flow diagram by the means of labour the do to receive small money or is by the tax received from employment works by the government and it is connected to to the flow as net taxes
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Question 1: the money we put into our bank account each payday can be referred to as saving or floor because it’s the money available for immediate use or money we put continuously Through Time, while the stock of money indicated by the balance in a passbook is referred to as stock because his believe that wealth has already flowed into existence in the past. Therefore flows and stock are related because they are quantity measurable in units or at a particular point.
Question 2: the savers are those who set aside money they don’t spend now for emergencies or for a future purchase.It’s money they want to be able to access quickly, with little or no risk, and with the least amount of taxes while Investors are those buying assets such as stocks, bonds, mutual funds or real estate with the expectation that their investment will make money for them. Investments usually are selected to achieve long-term goals.
Question 4: the change in the circular flow model if there is no money will be that they won’t be firm to produce, and government will not interfere because it will just be a trade between Farmers and fishermens etc and they won’t be any taxes, wages, rent etc paid.
Question 5: unemployed workers fit into the circular flow diagram in a sense that they are the one that have saved their money when they were employed and now use the money to satisfy their own needs by buying goods and services sold in the production market and the firms also produces more goods in order to satisfy the needs of the masses.
1) Difference between money in bank account each payday and the stock of money indicated by the balance I passbook.
Money put in the bank is what you have In your account all the time,this figures includes any transactions that have not been cleared.eg checks.
While stock of money is the available balance in checking or on-demand account or account holder.
1b)How are the flow and stock related.
They are related because the cash in bank Is a flow associated with the quantity of economic variable measured during a particular time.
While stock of money is related because it determines the level of stock on a specific point in time which is accumulated or depleted due over time due to flows.
1c)why is one referred to as flow and the other as a stock.
money put in bank is a flow because it changes in the commodity or assets during a particular period.
While stock of money is called stock because it implies the reserve of inventory or fund on a specific date.
2)In the real world,who are the saver and who are the investor.
Savers are those individuals that set aside a portion of their cash and invest it in the financial instrument to meet short term liquidity while obtaining returns, therefore the are called lenders.
While investors are those who require liquid funds to carry out a desired activity,the can be called borrowers (government).
4)How would the circular flow model change if there were no money in the system,that is,I all exchanges had to be barter exchanges?
When circular flow changes that means,that the household will render what the have (goods and services)at that given time in return for wages and salaries.
5)How do unemployed workers fit into the circular flow diagram?
Unemployed workers fit in the circular flow with saving and investment.
5b)what flows are connected to them.
Flows connected with unemployed workers is because they are mainly household incomers,the divert to saving and this is a source of funds for firms to use in making investment expenditures and then this income reaches product market indirectly,therefore,on the way from household to firms,the flow of saving passes through a set of financial markets.
1a) The money you put into your bank account each payday is called flow of money because income is a flow. While the stock of money indicated by the balance in your passbook is called stock because wealth is stock.
1b) The flow and stock are related because flow shows change during a period of time. e.g per hour, per weeks. Whereas stock indicate the quantity of a variable at a point of time. e.g may 19, 2010.
1c) One is referred to as flow because flows are measured in units per time period.whereas stock is quantity which is measured at a point of time. For example, illustration of both in a bathtub filling. When we talk about how fast the water is running, we are talking about a flow, measured in a gallons per minute. But when we talk about how much water is in the tub at a given moment, we are talking about a stock, measured only in gallons.
2) The savers are individuals, companies and government who sets aside a proportion of current income by forgoing immediate spending on consumption.while an investors is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns.
4) The circular flow model would change if there were no money in the system, when the household provide labour to the firm, then firm will pay them back with goods and services in return and vise versa.
5) The unemployed workers fit into the circular flow diagram through the household and the government pay them with transfer payment. Also flows are connected to them when household provide labour to the firm and firm pay back in return with wages.
Questions 1 _differentiate between the money you put into your bank account each payday and the stock of money indicated by the balance in your passbook.. The money you put into your bank account each payday can be classify as a saving or a flow because those are the processes that occurs continouslly through time whilethe stock of money indicated by the balance in your passbook can be classify into a stock or a stock of wealth because we assume that the wealth has already flowed into existence.
1ii _ How are the flow and stock related _ A flow and stock are related in the sense that both of them deals with a quantity measurable in units per time period or in gallons per minutes.
1iii_ Why is one referred to as flow and the other as a stock _ One is referred to as a flow because it is a quantity which is measured with referenceto a period of time while the other is refered to as a stock because it is a quantity which is measured at a particular point of time..
2. In the real world, who are the savers and who are the inverstors? In the real world a savers are those people who have too much money or funds to invest in business while an investors are those who do not have money but require or borrow money to invest in business..
4. How would the circular flow model change if there were no money in the system, that is , if all exchange had to be barter exchanges ? If there were no money in the system, the circular flow model will change in the form that money earned by firms in the product market is spent on resources in the resources market that is household who own properties will earn more rents, and households with money in the bank will earn more interest income.
5_ How do unemployed workers fit into the circular flow diagram?what flows are connected to them? When an unemployed worker fit intobthe circular flow diagram, there will be an increase in money in the circular flow of income as more people are now receiving wages. This increased income will result in an increase in consuption as there is an increase in demand for goods and services produced by firms.
1)The money you put in your bank everyday is your available balance which means that is the total amount of money the person is going to use at anytime.
(I)The stock of money shows the balance in your passbook is the current balance in your bank account.
(ii) flows and stock are related by the measurement of water in the gallons.
(III) it is referred to as a flow because it measures in gallon per minute while the other is referred to as a stock because it measures in gallons.
2)savers are those who deposits with banks and those that have excess money to invest and then receive interest payments and withdraw money.
(I) An investors is any person who commits capital with the expectation of receiving finincial returns.
(4)The firm would eventually have all of the money in an economy , households would have all of the finished products and economic activity would stop.
(5)when workers are unemployed ,the circular flow of income between the household sector and the firm .when members of households do not provide labour to business through the resource market .in turn , business or firms have inadequate resource to convert to goods and services . household and firms are circular flow that are connected to them.
2. In the real world who are the savers and who are the investors? A savers is someone who gives their money to someone else to control, eliminating opportunities to learn for themselves that will and will not make them more money….. but even though they may be referred to as ”investors”that doesn’t make them such.
5. How do unemployed workers fit into the circular flow diagram? What flows are connected to them? When workers are unemployed it fit the circular flow of income between the household sector and the firm. when member of household do not provide labor to businesses through the resource market. In turn, businesses or firms have inadequate resource to convert to goods and services. What flow are connected to them? Household and firms are circular flow are connected to them.
1. Differentiate between the money you put into your account each payday and the stock of money indicated by the balance in your passbook. How are the flow and stock related? Why is one referred to as a flow and the other as a stock? Is that money you put in your bank account each payday is your available balance, which means that, it’s the total amount of money you can spend at any time, while the stock of money indicated the balance in your passbook is the current balance in your account. How are the flow and stock related? How are the flow and stock related is that a stock is measured at one specific time, and represents a quantity existing at the point in time (say, December 31,2004), which may have accumulated in the past. A flow variable is measured over an interval of time.therefor flow would be measured per unit of time (say a year). Why is one referred to as a flow and the other as a stock? Why is one referred as a flow is because is also known as physical flow. Real flow refers to the flow of goodsand services across different sectors of the economy.flow of factor services from household sector to the produce sector or flow of goods and services.while other as a stock is a security that represents the ownership of a fraction.
4. How would the circular flow moded change if there were no money in the system, that is,if all exchange had to be barter exchange? The circular flow moded demonstrates how money moves through society. Money flow from producers to workers as wages and flow back to producers as payday for products. In short, an economy is an enable circular flow of money
That is the basic form of the model, but actual money flow are more complicated.Economist have added in more factor to batter dipict comPlex modern economics.These factors are the components of a nation’s gross domestic product (GDP) or nation’s income for that reason, the circular flow of income model.
(1) A stock is what one measure at a particular point in time which may have accumulate in the past WHILE A flow can be measured over an interval of time i.e it can be measured per unit of time.
(2) Savers are business investors,households,government,and foreigners, with excess funds WHILE Investors is a person or company that allocates money from Savers into a project or business hoping to make profit.
(4) Money flows from producers to workers as wages and salaries and also flows back to the producers as payment for product; thus,when there is no money in the circular flow model, the economy will fall.
(5) The unemployed workers fits into the circular flow diagram from the households to the firm in form of labour and they are connected with payment in the form of wages and salaries.
1.Te difference between the money you put in the bank account each payday and stock of money indicated the balance in your passbook is that Money you put in your bank everyday is your available balance which means that is the total amount of money you can spend at anytime,while the stock of money indicated the balance in your passbook is the current balance in your account
Why is one refered to as flow and the other as a stock ?
It is referred to as a flow because it measured in gallon per minute while the other is referred to as a stock because it’s measured in gallons
2.Savers are those who have excess money to invest while investors require money to invest .The main goal of any investor is to minimize risk and maximum return.
5. When workers are unemployed it means the circular flow of income between the household sector and the firm.
When members of households do not provide labor to business through the resource market .in turn, business or firms have inadequate resources to convert to goods and services.
Household and firms are circular flow that are connected to them
1) These are funds that are available for immediate use,and includes deposit while the stock of money indicated by the balance in your passbook is what you have in your account all the time (current balance).
1i) both the stock and flow are interdependent
1ii) it is a flow as it is the measurement of the rate at which things are happening while stock is measured at a particular time.
2) savers may be individuals, companies or governments while the investors are those people such as a firm or mutual fund who commits capital with the expectations of receiving Financial returns.
4) if markets for goods and services were the only markets available,firms would eventually have all of the money in an economy, households would have all of the finished products,and economic activity would stop.
5) They sell scarce resources (labor) for income and spend income to buy goods and services
5i) money flows from producers to workers as wages and flows back to producers as payments for product.
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1.a) The circular flow with 2 economy:
The clockwise arrow showing the flow of goods and services have been omitted,there are now two part ways through which expenditure can travel from households to firms as consumption expenditure made by the households on goods and services produced by the firms which are what they use for their consumption,while the flow of goods and services is in opposite direction from firms to households.The money flows from business firms to households as factor payments and then it flows from households to firms.The circular flow of money will continue indefinitely week by week and year by year.In a 2 economy there’s no government intervention
-Circular flow with savings and investment
From the 2 economy we saw that household spends their income on household goods and services,But in this economy which has to do with savings and investments,household do not spend all their income on only household goods and services but also save some which the firms make use for investment expenditure.In this economy there exists a set of financial institutions such as banks, insurance companies,financial houses, stock markets where households deposit their savings.All these institutions are called financial institutions or financial markets.Household saves their money in these financial markets.Firms on the other hand borrows from the financial markets for investments in capital goods such as machines etc.Firm spend on investment in order to expand their productive capacity in future.
b) Circular flow in a three sector Economy; with government:
When government enters the circular flow of income,things become likely complicating,there are now two new channels where funds can flow from household to product market,here we will concentrate on government spending, borrowing and taxing roles.
Government purchases goods and services just as household and firm does.Government expenditure takes many forms including spending on capital goods and infrastructure,on defence goods.Government expenditures may be financed through taxes or by borrowing.The money flow from household and firms to the government is known as tax payment.Government finance their expenditure by borrowing from the financial market.This can be represented by the money flow from the financial market to the government and is known as government borrowing.The government borrowing through its effects on the rate of interest affects the behaviour of firms and household.
c) Circular income flow in the 4 sector adding the foreign sector
The inclusion of the foreign sector will reveal to us the interaction of the domestic economy with foreign countries.Forrigners interact with the domestic firms and households through exports and imports of goods and services as well as through borrowing and lending operations through the financial market.Goods and services produced within the domestic territory which are sold to the foreigners are called exports.On the other hand purchases of foreign made goods and services by domestic households are called imports.In this economy it is assumed that it is only the business firms of the domestic economy that Interacts with the foreign countries.If exports are equal to the imports then there exists a balance of trade.If value of exports exceeds value of imports trade surplus occurs,on the other hand if value of imports exceeds value of exports of a country,trade deficit occurs.
2.a) The difference between the money you put into your account each payday and the stock of money indicated by the balance in your passbook is that the money you put into the bank every pay day is flow, it occurs continuously everyday, the money moves everyday from you into the bank account.On the other hand the stock of money indicated by the balance in your passbook is stock because the money has already flowed into existence in the past and has thus ceased to flow but has not ceasee to exist ie the money exists but doesn’t flow.
b) Flow and stock are related in the sense that flow influences the stock,as in increased flow of money supply in an economy results in increase in the quantity of money while stock influences flow as such greater amount of capital will lead to greater flow of services.
c)Flow is the money you put into your bank account each payday because flow are processes that occurs continuously through time which is the money paid into the account each payday.While stock is the stock of money indicated by the balance in your passbook because stock is considered that the wealth has flowed into existence in the past and not ceased to exist.
3.A saver is someone who gives their money to someone else to control,eliminating opportunities to learn for themselves what will make them more money.Also,Saver is someone putting aside gradually, typically into a bank deposit account.People generally save for a particular goal like paying for a car, a deposit on a house or building up a rainy day fund to cover any emergencies that might come up.
Invester on the other hand is someone that is turning a portion of their money to be put into mutual funds and stock equities in hopes of gaining a nice return.
Invester is someone using some of his money with the aim of making it grow by buying assets that might increase in value such as shares, property or units in an investment fund.
4.The circular flow model will change in the sense that it will just be a sector economy which is the household and firm.The household will not have money to pay because it is a barter system. The household will pay with labour in exchange of whatever good and services they want ie they will have to work to get the goods and services they want and on the other hand firms will get the factors of production after making an agreement with the household, they will get whatsoever goods they want after they have laboured.In this economy there might not be saving and investment of income cause the household aren’t getting paid but rather the household may save remaining of the goods that is yet to be consumed for future purpose.
5.How unemployed workers fit into the circular flow diagram:
They fit in the sense that there are considerations made for them.This is because not all the households are employed, the household is made up of working class and dependent class, the dependent class includes the old people ranging from 60years and above and the children ranging from 1-15years.The dependent class are usually considered as the unemployed workers.The working household uses part of their income to take care of the unemployed workers(dependent class).Therefore making sure that whatsoever they purchase from the firm is shared between them and the dependent ratio.
1. The money we put in our account are processes that occur through time and can be measured Naira per month and can be called flow while the money indicated by the balance in our passbook is the money that flowed into existence in the past Nd has thus ceased to flow but has not ceased to exist and can be called stock.
1b. Stock and flow are related because they are interdependent on each other. Stock influences flow as such greater amount of capital will lead to greater flow of services Nd flow influences stock as in increased flow of money supply in an economy results in great production. Both are measurable.
1c. Flow is the movement of some commodities from the producer to it’s destination, flow is measured in unit per time period AND Stock has already flowed into existence in the past. It has ceased to flow but has not ceased to exist.
2. Savers are business men or women that save their profit for future purposes example household
Investors are is a person that allocates capital with the expectation of a future financial return (return) or to gain an advantage (interest) e.g firms
4. Financial banks will no longer be available
5. When someone looses a job, a family is affected. Workers loose income, while the country looses production Nd consumers spending . The rising of unemployment as a sign of weak economy, with slow growth and little spending.
5b. Firms and government
2a) savers: are parties who preserve money to be invested eg domestic households, businesses, government and foreigners with excess funds.
2b) investors: is a person that allocates capital with the expectation of a Future financial return(profit) or to gain an advantage ( interest) eg pre_ investor , passive investors and active investor
4a) they will be unemployment in d society
b ) they won’t be financial banks available
c) all our savings will be done at home
5a) firms : without firms the factor of production and distribution won’t flow well.
STOCK
a) STOCK: doesn’t have a time dimension attached with it
c: STOCK: is static in nature
b: STOCK: influence the flow as such greater amount of capital will lead to greater flow of service
FLOW
a) flow is defined as a variable which is measurable at a period of time
b: flow has a time dimension attached with it
c : flow is dynamic in nature
d: flow influence d stock,as in increased flow of money supply in an economy results in increase in the quantity of money.
Assignment on Eco 002
(1)Differentiate between the money you put into your bank account each day payday and the stock of money indicated by the balance in your passbook.how are the flow and stock related?why is one referred to as a flow and the other as a stock?
(A)The difference between the money you put into your bank each perday and the stock of money indicated by the balance in your passbook
Simply means that the money some one puts in his or her bank account each perday is the a available or obtainable balance and it is the whole amount of money that can be spent on any tax payment.
(B) The stock of money settles the balance in the passbook,which is the person’s account.2
(2)In real world,who are the savers and who are the investors?
(A) savers are people who preserve money
to be invested.
(B)An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases properties.
(4)How would the circular flow model change if there were no money in the system, that is,if all exchanges had to be barter exchanges?
(A)The reason why the circular model change’s if there no money in the system,is because, in an economy money moves from producers to workers as wages and then back from workers to producers as worker’s spend money on products and services. That is to say that in the circular model if there is no money in the system it will affect the economy of the country and the people living in it.
(5)How do unemployed workers for into the circular flow diagram?what follows are connected to them?
(A) unemployed workers fit into the circular flow diagram is when workers are unemployed,it is the circular flow of income between the House hold sector and the firm. When members of households, do not provide Labour to businesses through the resource market.
(B) Household and firms are circular flow that are connected to them.
1) The difference between the money we put into our bank account each pay day and the stock of money indicated by the balance in our passbook is that the money we put into our bank account each day is known as flow. As flow whereby measure the time while The stock of money indicated by balance in our pass book is stock. Therefore stock measures the amount of money or goods . The money inside our passbook is constant .
1b) A stock measured at one specific time, and represents a quantity existing at that point in time while flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time(a year)
1c) it is referred to as flow because it is the process that occur continuously through time, it is also measured in unit per time period, for example, in naira per month, gallon of water per minutes, measurement of flows are therefore measurement of the reates at which things are happening.
While
It is reffered to as stock Beacause it is the amount of money that is being saved. Stock is used to measure quantity of a particular goods or money.The money in my passbook is constant .
2) In real world the savers are the domestic household,businesses,government, and foreigners with excess finds in which they give funds to an intermediary institution(such as bank) and that institution gives those funds to spenders.
– In the real world the investors are the people that allocates capital with the expectation of getting future financial return or to gain an advantage eg firms.
4) First of all money flows from producers to workers as wages and flows back to producers as payment for product,so therefore, if there is no money in the circular flow system it will result to a nations gross domestic product(Gdp) or the national income and it will lead to the government borrowing from the financial market.
5) When unemployed workers enters the circular flows there will be an increase in money in money in the circular flow of income as more people are now receiving wages.This increase in income will result in an increase in consumption as there is an increase in demand for goods and services produced by firms
5) The flows connected to them(unemployment) are the Firms and government
Circular flow of income Second-sector of the economy
★In the lower part of the figure, money flows from households to firms as consumption expenditure made by the households on the goods and services produced by the firms, while the flow of goods and services is in opposite direction from business firms to households.
★But savings by households need not lead to reduced aggregate spending and income if they find their way back into flow of expenditure. In free market economies there exists a set of institutions such as banks, insurance companies, financial houses, stock markets where households deposit their savings. All these institutions together are called financial institutions or financial market. We asÂsume that all the savings of households come in the financial market. We further assume that there are no inter-households borrowings.
Circular flow of income Third-sector of the economy
The three-sector economy model includes the role of government when determining the flow of money.
★WallStreetMojo
Home » Investment Banking Resources » Economics Resources » Circular Flow of Income
Circular Flow of Income
Article by
Madhuri Thakur
Reviewed by
Dheeraj Vaidya, CFA, FRM
Circular Flow of Income Definition
Circular flow of income is an economic model that describes how the money exchanged in the process of production, distribution and consumption of goods and services flows in a circular manner from producers to consumers and back to the producers.
Key Takeaways
Circular flow of income refers to the economic model describing the circular movement of money between Firms/Producers and households. Such a model is also called a two-sector economy, as it only considers two sectors, household and firms.
In the real world, many additional players like the government, national income
and foreign markets are taken into account. This drastically increases the complexity, but the end result still is a circular flow of income.
To overcome the drawbacks of the two-sector economy, other models are used as a reference to understand the flow of money at the macro level. These models are a three-sector model of economy and four-sector model of the economy.
Diagram of the Circular Flow of Income
The flow of money in society can be referred to in the diagram below:
Circular Flow of Income
You are free to use this image on your website, templates etc, Please provide us with an attribution link
The circular flow of income is an integral concept in economics as it describes the foundation of the transactions that build an economy. The basic model of the circular flow of income considers only two sectors, the firms and the households, which is why it is called the two-sector economy model.
Let understand the meaning of these terms as well as the whole concept in simple steps.
Firms are the producers of goods and services. Firms require various factors of production or societal resources to produce goods and services.
The factors of production are land, labor, building, stock, stationery, etc.
Households provide the resources or factors of production. For example, a household provides land and labor to carry out business operations
in exchange for the money paid in the form of rent, wages, etc.
So, the money flows from the firms to the household in the form of rent, wages, etc.
The households utilize the money from wages and rent to purchase certain goods and services to full their needs and wants.
When the households pay for these goods and services, the money flows back to the firms, completing the circular movement of money.
Example
We can take the example of a Nutella factory to explain the circular flow of income.
Here, the Nutella factory is the firm which is the producer of jars of Nutella spread. Some of the factors of production include cocoa beans, land for housing the factory, the building, and laborers for carrying out the production process.
The household that has rented out it land to establish the factory will enjoy heavy monetary compensation or rent in exchange. Simultaneously, the labor will be compensated with wages in exchange for their hard work to produce jars of the chocolate spread.
The logistics team will be paid further for delivering the Nutella jars to stores and e-commerce warehouses.
The household will purchase the Nutella jar utilizing the money it earned as wages or rent.
When households pay for the Nutella Jars, the money will reach the factory owners, completing the money’s circular flow.
It is important to note that the economy is running on several thriving circular movements of money. Obviously, the above example is simplistic.
For a macro-level understanding, the two-sector model is not sufficient as many complex factors are not considered to explain the flow of income and expenditure. The factors include national income, the role of the government, foreign trade and the like. Two and Three sectors of economy model respectively look at such issues.
Also, the circular flow of income caters to the need of including the complexities of income and expenditure. The circular flow of income helps to calculate per capita income
, GDP
, and other macroeconomic factors
that are integral to formulate national and international economic policies.
Also, the liquidity
may vary over a period, i.e. the volume of money circulating in the economy may change depending on the economy’s state. So, if it is in a recession, the volume will decrease due to a decrease in national income. In contrast, it will increase in case of boom due to an increase in national income.
These complexities can be understood by learning about the circular flow of income in 2, 3, and 4 Sector Economy model, respectively.
Circular Flow of Income in 2 Sector Economy
Like we said before, the two-sector economy is a fundamental model consisting of only sectors firms and households. Other assumptions of this model are as follows.
There are no savings by the households. Whatever they earn, they spend in the form of consumer expenditure.
There is no profit retained by firms and whatever they earn from selling goods and services; it is given back to households in the form of wages, rent, etc.
There is no government to interfere in the money flow, i.e. there is no tax liability on the households or regulations imposed on the movement.
It assumes that it is a closed economy without any external interference of foreign countries, i.e. there is no trade foreign trade.
Some of these drawbacks are rectified in the three-sector model.
Circular Flow of Income in a Three-Sector Economy
The three-sector economy model includes the role of government when determining the flow of money. In this type of economy, government plays an essential part.
A three-sector economy model rectifies some of the drawbacks of the two-sector model by introducing the following.
★The government plays a pivotal role as it consumes a major portion of the money flow in the form of taxes.
★The flow of money follows from the firms and households to the government in the form of taxes.
★The government utilizes taxes to develop the infrastructure and many other services like healthcare, education, etc. So, to the firms, the government pays back in terms of incentives and by purchasing their goods
Circular flow of income in a four-sector economy
The four-sector economy model is an open-ended economy that goes a step beyond by considering the foreign sector’s role in the overall economic cycle.
★By the introduction of the foreign sector, the scope widened further. The money flows to households or firms when they buy goods and services from a foreign country, also known as imports.
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Home » Investment Banking Resources » Economics Resources » Circular Flow of Income
Circular Flow of Income
Article by
Madhuri Thakur
Reviewed by
Dheeraj Vaidya, CFA, FRM
Circular Flow of Income Definition
Circular flow of income is an economic model that describes how the money exchanged in the process of production, distribution and consumption of goods and services flows in a circular manner from producers to consumers and back to the producers.
Key Takeaways
Circular flow of income refers to the economic model describing the circular movement of money between Firms/Producers and households. Such a model is also called a two-sector economy, as it only considers two sectors, household and firms.
In the real world, many additional players like the government, national income
and foreign markets are taken into account. This drastically increases the complexity, but the end result still is a circular flow of income.
To overcome the drawbacks of the two-sector economy, other models are used as a reference to understand the flow of money at the macro level. These models are a three-sector model of economy and four-sector model of the economy.
Diagram of the Circular Flow of Income
The flow of money in society can be referred to in the diagram below:
Circular Flow of Income
You are free to use this image on your website, templates etc, Please provide us with an attribution link
The circular flow of income is an integral concept in economics as it describes the foundation of the transactions that build an economy. The basic model of the circular flow of income considers only two sectors, the firms and the households, which is why it is called the two-sector economy model.
Let understand the meaning of these terms as well as the whole concept in simple steps.
Firms are the producers of goods and services. Firms require various factors of production or societal resources to produce goods and services.
The factors of production are land, labor, building, stock, stationery, etc.
Households provide the resources or factors of production. For example, a household provides land and labor to carry out business operations
in exchange for the money paid in the form of rent, wages, etc.
So, the money flows from the firms to the household in the form of rent, wages, etc.
The households utilize the money from wages and rent to purchase certain goods and services to full their needs and wants.
When the households pay for these goods and services, the money flows back to the firms, completing the circular movement of money.
Example
We can take the example of a Nutella factory to explain the circular flow of income.
Here, the Nutella factory is the firm which is the producer of jars of Nutella spread. Some of the factors of production include cocoa beans, land for housing the factory, the building, and laborers for carrying out the production process.
The household that has rented out it land to establish the factory will enjoy heavy monetary compensation or rent in exchange. Simultaneously, the labor will be compensated with wages in exchange for their hard work to produce jars of the chocolate spread.
The logistics team will be paid further for delivering the Nutella jars to stores and e-commerce warehouses.
The household will purchase the Nutella jar utilizing the money it earned as wages or rent.
When households pay for the Nutella Jars, the money will reach the factory owners, completing the money’s circular flow.
It is important to note that the economy is running on several thriving circular movements of money. Obviously, the above example is simplistic.
For a macro-level understanding, the two-sector model is not sufficient as many complex factors are not considered to explain the flow of income and expenditure. The factors include national income, the role of the government, foreign trade and the like. Two and Three sectors of economy model respectively look at such issues.
Also, the circular flow of income caters to the need of including the complexities of income and expenditure. The circular flow of income helps to calculate per capita income
, GDP
, and other macroeconomic factors
that are integral to formulate national and international economic policies.
Also, the liquidity
may vary over a period, i.e. the volume of money circulating in the economy may change depending on the economy’s state. So, if it is in a recession, the volume will decrease due to a decrease in national income. In contrast, it will increase in case of boom due to an increase in national income.
These complexities can be understood by learning about the circular flow of income in 2, 3, and 4 Sector Economy model, respectively.
Circular Flow of Income in 2 Sector Economy
Like we said before, the two-sector economy is a fundamental model consisting of only sectors firms and households. Other assumptions of this model are as follows.
Circular Flow of Income in 2 Sector Economy
You are free to use this image on your website, templates etc, Please provide us with an attribution link
There are no savings by the households. Whatever they earn, they spend in the form of consumer expenditure.
There is no profit retained by firms and whatever they earn from selling goods and services; it is given back to households in the form of wages, rent, etc.
There is no government to interfere in the money flow, i.e. there is no tax liability on the households or regulations imposed on the movement.
It assumes that it is a closed economy without any external interference of foreign countries, i.e. there is no trade foreign trade.
Some of these drawbacks are rectified in the three-sector model.
Circular Flow of Income in a Three-Sector Economy
The three-sector economy model includes the role of government when determining the flow of money. In this type of economy, government plays an essential part.
Circular Flow of Income in a Three-Sector Economy
You are free to use this image on your website, templates etc, Please provide us with an attribution link
A three-sector economy model rectifies some of the drawbacks of the two-sector model by introducing the following.
The government plays a pivotal role as it consumes a major portion of the money flow in the form of taxes.
Hence, the flow of money follows from the firms and households to the government in the form of taxes.
The government utilizes taxes to develop the infrastructure and many other services like healthcare, education, etc. So, to the firms, the government pays back in terms of incentives and by purchasing their goods.
The government pays to the households in terms of interest rates on government securities, pay revisions, government jobs etc.
Thus together, it all completes the circular movement of money.
If the government’s income from the taxes is less than its expenditure, it is said to have a deficit budget.
As such, the role of government cannot be ignored in any economy because of such a huge control it possesses over the economic cycle. Governmental interference affects the overall economic performance of a country.
A three-sector economy does not consider the role of foreign markets, which has become even more prevalent in the current globalized world.
Circular Flow of Income in A Four Sector Economy
The four-sector economy model is an open-ended economy that goes a step beyond by considering the foreign sector’s role in the overall economic cycle.
Circular Flow of Income in A Four Sector Economy
The main features of the four-sector economy are as follows:
★By the introduction of the foreign sector, the scope widened further. The money flows to households or firms when they buy goods and services from a foreign country, also known as imports.
★The money flows back to households when foreign countries give them employment. For firms, money flows back when foreign countries purchase their goods and services, also called exports.
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1. DIFFERENTIATE BETWEEN MONEY YOU PUT IN YOUR BANK ACCOUNT EACH PAYDAY AND THE STOCK OF MONEY INDICATED BY THE BALANCE IN YOUR PASSBOOK. HOW ARE THE FLOW AND STOCK RELATED? WHY IS ONE REFERRED TO AS FLOW AND THE OTHER AS A STOCK?
A. Money we put in our bank each payday is inflows of income generated while the stock of money in the passbook is the balance of the deposits and withdrawal of the account owner
Money we put in our bank each payday are referred to as flows while that of passbook are stock of asset of the account owner
B. Flows and stocks are related where the debit balance as per the cash book means the balance of deposits held at the bank. Such a balance will be a credit balance as per the passbook. Such a balance exists when the deposits made by the firm are more than its withdrawals.
Passbook or Bank Statement is a copy of the account of the customer as it appears in the bank’s books. … All entries made by a customer in his cashbook (bank column) must be entered by the bank in the passbook. Hence, the balances as per bank column of the cashbook must agree with the balance as per passbook.
C. One is referred to as flow and the other as stock because One (Passbook) is issued by the bank to the account holder that records the deposits, withdrawals and balances in the bank and it can be used anytime by the owner to settle debt and other financial obligation. While the other is regarded as flows because of it is deposit and inflow of cash into the bank.
2. IN THE REAL WORLD WHO ARE THE INVESTORS AND WHO ARE THE SAVERS?
SAVERS
Savers may be individuals, companies, or governments. For example, if you put money in a time deposit, you are a saver. Companies set aside a portion of their cash and invest it in the financial instruments to meet short-term liquidity while obtaining returns. In this case, they are also savers.
INVESTORS
An investor is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns. The Most Important Thing. More than anything, investors want to see a return on their investment. Investors are in the business of putting money into growing businesses so they can make money.
4. HOW WILL THE CIRCULAR FLOW MODEL CHANGE IF THERE WERE NO MONEY IN THE SYSTEM, THAT IS IF EXCHANGE HAD TO BE BY BARTER EXCHANGE
The circular flow model demonstrates how money moves through society. Money flows from producers to workers as wages and flows back to producers as payment for products. In short, an economy is an endless circular flow of money. If exchange is to be done in barter system it will change the basic four circular flow which are Consumer spending —> Revenue —> Cost —> Income. In this situation there will be no injection of money in the economy nor revenue which flows from firm to household back to the producers. Also there will be no production. There may be incidence of double coincidence of want which may affect consumers.
5. HOW DO UNEMPLOYED WORKERS FIT INTO THE CIRCULAR FLOW DIAGRAM? WHAT FLOWS ARE CONNECTED TO THEM.
When someone loses a job, a family is affected. Workers lose income, while the country loses production and consumer spending. … Rising unemployment is seen as a sign of a weak economy, with slow growth and little spending.
And workers are connected to the firm/business cyclical flow.
Question 1 answer :The difference between the money, You put into your bank account each day and stock of money indicated by the balance in your passbook is the money, you put in your account in each daypay is your available balance which means is the amount of money, you can with draw at anytime while the stock of money is your current balance which shows the current amount of money in your account or passbook
Question 1i: flows and stock are related by measurement of water in gallons
Question 1ii: it is refered to as a flow because its measured in gallons per minute while the other is refered as a stock because it’s measured only in gallons
Question 2: financial market are the savers while firms are the investors
Question 4: firms can borrow from financial markets to obtain the funds, they need for investment purposes
Question 5: when workers are unemployed, it fits the circular flow of income between The household sector and the firm. when members of household do not provide labour to business or firms have inadequate resource to convert to goods and services
Question 5: household and firms are circular flow that are connected to them.
Circular Flow of Income in a Two-Sector Economy.
It is defined as the flow of payments and receipts for goods, services, and factor services between the households and the firm sectors of the economy.
1.The diagram above shows the flow of factor services from households to firms and the corresponding flow of factor payments from firms to households.
2.The diagram above also shows the flow of goods and services from firms to households and the corresponding flow of consumption expenditure from households to firms.
3.The entire amount of money, which is paid by firms as factor payments, is paid back by the factor owners to the firms which is known as dividend.
Circular Flow of Income in a Third-Sector Economy.
The three-sector economy includes the role of government when determining the flow of money.
1.The flow of money follows from the firms and households to the government in the form of taxes.
2.If the government’s income from the taxes is less than its expenditure, it is said to have a deficit budget.
3.The government pays to the households in terms of interest rates on government securities, pay revisions, government jobs etc.
Circular Flow of Income in a four-Sector Economy.
The Four-sector economy includes the household sector, business sector, government sector, and foreign sector.
1.The money flows to households or firms when they buy goods and services from a foreign country, also known as imports.
2.The money flows back to households when foreign countries give them employment. For firms, money flows back when foreign countries purchase their goods and services, also called exports.
3.If the value of imports is equal to the value of exports, it is called balanced trade. If imports are greater than exports, it is referred to as a trade deficit. But if exports are greater than imports then it is called a trade surplus.
1.the difference between the money you put into your account each payday and then stock of money indicated by the balance in your passbook is that money you put in your account each payday is the available balance that can be withdrawn at any given time while the stock of money indicated by the balance in your passbook is the current balance in your account
1i.flows and stock are related by the measurements of water in gallons
1ii.it is referred to as flow because it’s measured in gallons per minute while the other is referred to as a stock because it’s measured only in gallons
4.firms can borrow from financial markets to obtain the funds they need for investment purpose
5.when worker are unemployed it fits the circular flow of income between the household sector and the firm.When members of household do not provide labor to firms through the resources market.in turn,firms have inadequate resources to convert to goods and services
5i.household and firm are circular flow that are connected to them.
1a. The money put in my bank payday is flow
And the money indicated in the bank is stock
b.they are related in terms of development of economic variable and are interdependent on each other as stock (measure at one specific time )and flow (measure over an interval of time)
C.stock is measured at one specific time and represent a quantity existing at the point in time (January 4,2004).flow is a variable measured over an interval of time.it is measured per unit of time (year)
2.savers are the domestic household, businesses, government .investors are the firm’s and individuals
4.it will flow from producer to consumer e.g if a farmer give out a wheat for a pairs of shoes ,the circular flows from the producer (farmer)to the consumer.barter exchange is an exchange of good and service .it doesn’t involve money
5.they fit in the household.
The flow that connects them is spending.