ECO 285The Circular Flow Model

Dr. Dennis Foster – Spring 2014

Additional References

• Wikipedia on the Circular Flow of Income

• St. Louis Fed video

• The circularflow model critiqued

• YouTube video

CF I – 2 sectors & no saving

Households (HH)

Businesses (Bus)

Goods and Services

Factor “rental” – land, labor, capital

Consumption Expenditures

Income to factors

Real flows.Money flows.

CF II – 2 sectors & saving

Households (HH)

Businesses (Bus)

Goods and Services

Factor “rental” – land, labor, capital

Consumption Expenditures

Income to factors

Real flows.Money flows.

Financial Intermediaries

Saving

Investment

CF II* – 2 sectors & saving

Households (HH)

Businesses (Bus)

Goods and Services

Factor “rental” – land, labor, capital

Consumption Expenditures

Income to factors

Real flows.Money flows.

Financial Intermediaries

Saving

Investment

Investment Goods

I

C

CF III – 3 sectors & saving

Households (HH)

Businesses (Bus)

Goods and Services

Factor “rental” – land, labor, capital

Income to factors

Real flows.Money flows.

Financial Intermediaries

Saving

Investment

Investment Goods

I

Gov’t.Government Expenditures

Taxes

Gov’t. G & S

C

CF III – money flows only

Households (HH)

Businesses (Bus)

Income to factors

Money flows.

Financial Intermediaries

Saving

Investment

I

Gov’t.Government Expenditures

Taxes

C

CF IV – 4 sectors; money flows

Households (HH)

Businesses (Bus)

Income to factors

Money flows.

Financial Intermediaries

Saving Investmen

t

I

Gov’t.Government Expenditures

Taxes

Foreign Sector

Imports

Exports

Imports spendingExports spending

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.

--Can’t measure physical flows.--Can measure money flows.--Can measure expenditures or income.

GDP & Data

• GDP = Income = C + I + G +(Ex-Im)

• NBER business cycle page

• FRED recession graph

• Economic Report of the President

ECO 285The Circular Flow Model

Dr. Dennis Foster – Spring 2014