ECO 285 The Circular Flow Model

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ECO 285The Circular Flow Model

• Dr. Dennis Foster Spring 2014

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Additional References

• Wikipedia on the Circular Flow of Income
• St. Louis Fed video
• The circularflow model critiqued
• YouTube video

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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.
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CF II 2 sectors saving
Consumption Expenditures
Goods and Services
Investment
Saving
Financial Intermediaries
Businesses (Bus)
Households (HH)
Factor rental land, labor, capital
Income to factors
Real flows.
Money flows.
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CF II 2 sectors saving
Consumption Expenditures
Goods and Services
Investment
Saving
Financial Intermediaries
Businesses (Bus)
Households (HH)
I
Investment Goods
Factor rental land, labor, capital
Income to factors
Real flows.
Money flows.
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CF III 3 sectors saving
Govt.
Government Expenditures
Taxes
Govt. G S
C
Goods and Services
Investment
Saving
Financial Intermediaries
Businesses (Bus)
Households (HH)
I
Investment Goods
Factor rental land, labor, capital
Income to factors
Real flows.
Money flows.
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CF III money flows only
Govt.
Government Expenditures
Taxes
C
Investment
Saving
Financial Intermediaries
Businesses (Bus)
Households (HH)
I
Income to factors
Money flows.
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CF IV 4 sectors money flows
Govt.
Government Expenditures
Taxes
C
Imports
Foreign Sector
Businesses (Bus)
Exports
Households (HH)
I
Saving
Investment
Financial Intermediaries
Income to factors
Imports spending
Exports spending
Money flows.
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Why the Circular Flow Model?
1. To show how the different sectors of the
economy interact with one another.
2. To measure the level ofeconomic activity.
--Cant measure physical flows. --Can measure
money flows. --Can measure expenditures or income.
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GDP Data

• GDP Income C I G (Ex-Im)
• NBER business cycle page
• FRED recession graph
• Economic Report of the President

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ECO 285The Circular Flow Model

• Dr. Dennis Foster Spring 2014