A circular flow of the economy is a graphical depiction of the economy where the major exchanges are clearly represented as flows of goods, money and services, with little or no intermediary processes in between. The flows of goods and money exchanged in a closed circle correspond both in quantity, but also run in the other direction. This kind of economy is characterized by a surplus, or rather, a deficit in potential consumption, and a balance in trade balance. In this type of economy there is great potential for growth, and hence the term “circular economy.”
There are many different models of circular flow, or flow diagrams. For instance, a simple circular flow diagram can be created using a spreadsheet and may illustrate the effect on the distribution of wealth in society, depending on whether there is a left or right to economic activity. A more complex diagram, which attempts to capture the effects of circular flows on output and income, can be visualized using force diagrams. These force diagrams are used to depict the distribution of productivity in society. One example of a force diagram is the Y axis approach, where the location of the dots represents different economic activities, and the thicker lines show the relationships among them.
A circular flow diagram has been used extensively in economic theory. David A. Grossman and Albert Einstein are the leading economists who have used it extensively, particularly in their work, Theory of Employment, Theory of Wages. In this work, Grossman and Einstein explain how an increase in the volume of production can be translated into a rise in pay. However, as is well-known, there is a limit to this elasticity. In their paper, they derive a qualitative definition of surplus unemployment.
The circular flow diagram is used by many modern theorists of macroeconomics, including those such as saying, Solon, and even Keynes. Still widely used today, it provides a vivid illustration of the concepts of demand and supply. Say for instance, if there is a rise in the level of demand, then the supply will have to fall. This causes prices to rise, so that equilibrium is restored, at which point the process starts all over again. The circular flow describes what happens when there is a balance of excess unemployment against adequate employment.
There are several other uses of a circular flow chart. For instance, it is used in business analysis to show how the different factors affecting production, marketing, and sales affect overall economies. By plotting the evolution of a company's capital structure, it is possible to pinpoint when the company has reached a stage of over-all depletion of its capital. As production and marketing costs rise, so does the rate of interest required to fund these activities, and eventually it falls below the equilibrium level.
A circular flow diagram is also used in environmental assessment. It can be used to depict the relationship between water and soil pollution, or between energy production and greenhouse gas emissions. It can even depict the likely effects of a nuclear power station on the nearby environment.
Circular Flow Diagram in Economics: Definition & Example Video – circular flow diagram economics | circular flow diagram economics
The Circular Flow of Economic Activity – circular flow diagram economics | circular flow diagram economics
Circular flow of income – Wikiwand – circular flow diagram economics | circular flow diagram economics
One of the best things in life is seeing a smile on your parents' faces, and realizing that you are the reason. Just because someone else is not nice to us, doesn't mean we have to reciprocate in the same way. For every human in this world, God has given something noble and good in his heart. Always take care of your heart.
If you have been in business for any amount of time, then you have probably encountered some version of Economics 101. This is the class that discusses market data and the economic theory behind it. While the subject matter is important, it is only one component of the large number of topics that are ...
When learning economic terms, it is essential to be able to differentiate between commonly used and clearly defined terms. The difference between these two types of terms is actually fairly large. Generally speaking, the commonly used words have a clear and precise meaning while the more obscure ones have no definite meaning. In any ...