The Circular Flow Model

circular flow diagram

Why National income is different from country to country? Of the factors mentioned in the post Determines incom nation, explain that why some countries have higher incomes than in other countries, and suggests some difficulty in raising the national income. We will investigate this issue more fully in the upcoming posts. This time we'll talk of National Revenue and the theory of circular flow.

For now we will turn our attention to the same problem puzzling: why so many countries, with the skilled population, a lot of resources, a highly advanced technology, supply of capital that has been built for centuries, and a viable political stability, are still failed to make the most of their fortunes? They may fail to use all their resources, which means the existence of unemployment and lower living standards than they should.

Or perhaps they suffer from the price increase continues we call inflation. Inflation destroys trust, undermine a country's international trade by making the exposure is too expensive to buy foreign., And hurt people who depend on fixed incomes. The last few years we have experienced both decay at the same time. This situation called stagflation, stagnation combined with inflation, the stiff but useful.

Circular flow model
To find out the problem, let's see what should be happening in the economy is going well. Which is intended to run in a way that orthodox economists say the economy is actually running. These economic experts ranging from Adam Smith came to the economists in the early 1930s (which deserves special mention is a French named JB Say (1767-1832), who for his services the entire theory is sometimes referred to as " say the law "). They discussed "the circumference of the flow of production and income"  or Circular Flow model they visualize a situation in which individuals (or "housekeeping", a term more commonly used) is offering the use of their labor, capital or land, or they may have ("factors of production "), to the producers (companies') as a substitute for income. The companies that make use of production factors to produce the flow of goods and services. Goods and services are then purchased by households with income that has been paid to them by the companies. The whole process was very smooth and balanced. This (and in most textbooks) can be summarized in a diagram called " circular flow model "

Here the blue line illustrates the flow of real objects, the work done by individuals (or modes or land which they provide), illustrated by a drawing in blue line, which moves from households to firms, and the flow the product as well as goods services described by the blue line the bottom of the move back from the company to the individual.

This offset is cash flow, which is shown by the red. Money issued by companies to individuals as wages (or interest or rent to people who are lucky enough to have the capital or land). This money is then returned to the company if the individuals spend the money on the company's products in question. So offering to create its own demand "(that's how the law is summarized in the popular Say) if something is produced, a person receives income with the income it popular and people buy the product.

So post this time, when there is less or more please write in the comments field