Circular flow of income

“The circular flow diagram occurs in virtually all modern introductory economics textbooks as a way of explaining flows of income between firms and households and their measurement in the national accounts.”

“If the society toward which we are developing is not to be a nightmare of exhaustion, we must use the interlude of the present era to develop a new technology which is based on a circular flow of materials such that the only sources of man's provisions will be his own waste products.”

“The circular-flow diagram is a visual model of the economy. The circular flow of income is coordinated by four key markets. First, the resource market (bottom loop) coordinates businesses demanding resources and households supplying them in exchange for income. Second, the loanable funds market (lower center) brings the net saving of households plus the net inflow of foreign capital into balance with the borrowing by businesses and governments.”

“Fiscal, monetary, and growth policies are used by the government to maintain a healthy economy. We will look at their interaction and effects on the economy in two ways. The first is to use the circular flow diagram with government and the international sectors added. Another is to look at how these policies affect aggregate demand and aggregate supply.”

“In this model (circular-flow diagram), the economy is simplified to include only two types of decision makers—firms and households. Firms produce goods and services using inputs, such as labor, land, and capital (buildings and machines). These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce.”

“The circular-flow diagram a visual model of the economy that shows how dollars flow through markets among households and firms change much. We may even make the extreme and artificial assumption that all prices are completely fixed.”

“The circular flow diagram separates the economy into the business sector and household sector. The business sector supplies products and demands resources used in the production process. The household sector demands products and supplies resources used in the production process.”

“The competitive price system uses supply-demand markets to solve the trio of economic problems — What How, and For Whom All demand relations are shown in blue. all the supply relations, in black.”

“How do we measure the net national product, NNP? The general idea is simple. Figure 10-1 shows the circular flow of dollar spending in an economy with no government and no accumulation of capital or net saving going on.”