As money flows from buyers to sellers in the circular flow model, households end up with finished products. In this case, money flows from households to firms in exchange for the goods and services on offer. The market for goods and services assumes that households will always purchase finished products, consequently support the production process. The circular flow model is made up of two main categories. Likewise, money paid to foreign companies also suppresses the circular flow of money in an economy.Ĭircular Flow Model Basics: How Money Flows In An Economy The leakages, in this case, may occur in the form of taxes imposed by the government that affects the amount of money in circulation for buying goods and services. Leakages also do occur in the circular flow model. Therefore, the flow of products and money is highly dependent on economic cycles. In times of economic depression or recession, the flow of products and money remains at subdued levels. An economy is likely to experience a high flow of goods services and cash in times of economic prosperity. One thing to remember is that the flow of goods services and money does not occur at a constant rate all the time. Since civilized societies experience an endless flow of money on a daily basis, the circulation covers the flow of goods and services from producers to households or consumers in exchange for cash. Definition: The circular flow model is a term used to describe how products and money move in an economy.
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