Circular flow of income
Circular flow of income is a model of the economy, in which the main exchanges occur as cash flows and flows of goods between the economic actors are shown. Money and goods are the same value in a closed circuit, but in the opposite direction.
Simple economic cycle
This model is limited to the relations between the sectors consumers and producers. The economic cycle provides the essential financial flows and flow of goods between the two. Influences of the state, credit institutions, institutional investors, as well as from abroad will not be considered.
The money consists of the income and consumption expenditure of households, as well as the revenue and expenditure of the entrepreneurs.
Assets flow in the flow of goods (goods and services) of the company to the consumers and the production factors (labour, land, capital) of the households to the company.
In this perspective, the households the company the factors of production, in particular the work factor, available and produce no goods. For the households receive from the companies’ income (wages, interest, basic pension). As it is to charges for the factors of production (wages, interest, rent, lease) is known as factor income.
The income flow for purchases of consumer goods is of the households to the company. For its part the companies provide consumer goods to households. Flow between households and businesses so two goods flows (factors of production, consumer goods) and one each two flows in opposite directions (income, expenditure on consumer goods). Thus, the cycle is closed, static (not growing).
Advanced economic cycle (including loans)
The advanced economic cycle includes the possibility that households consume not your entire income, but also save a part of it. Including is any form of wealth accumulation and wealth management to understand, for example, also reserves in the company balance sheets. Also from the savings income flow, namely interest income.
The companies also make a contribution to wealth creation, for example, by reserves form (= saving the companies) or depreciation on your production facilities. These write-downs are the costs, the result of wear and tear of the machines, but not in the company lead to disbursements, so be available for investment.
In the classic teachings it is often presented in such a way that of banks managed savings to operators in the form of loans will be awarded. That is a fact but not the case. In the balance sheet lending requires no offsetting position in the form of savings. Scriptural money by lending is newly created. Investments are in tangible fixed assets in the present context to understand, not as investments, which are a form of savings. For example, are not sufficient demand for new loans (loans awarded as new repaid), is the economy is not new money to be made available next, because the money for credit (excl. Interest) is not back (because all intents to zero) flows in the circuit. In the absence of planned investments or bank loans can not be financed, decreases the level of economic activity. Companies begin to save your expenditure, lower income are counted (in turn, means less expenditure to other) of the circuit is stagnating, i.e. the economic performance decreases.
Full economic cycle (including state)
The state affects the economic cycle in several respects. On one hand he takes taxes and social security contributions of the economic agents. Both households and businesses include direct and indirect taxes. On the other he counts income (wages and transfer income) to the households and makes the company purchases (government consumption), where he also has the ability to provide subsidies to companies. Here is the flow no direct compensation in the form of a design all processes across compared to.
The relations between the State and the credit institutions demonstrate the ambivalence state activities. In an economy is the deficit compared to usual periods tend to be decreasing, so the economy in the imbalance, so is it possible for a state debt inclusions (national debt) establish a balance risks tend to be the so-called national debt crowding-out effect.
An open economy economic cycle
In this economic cycle is to the existing sectors of the sector abroad with added. It can affect every household sector. For example the households can receive foreign factor income (e.g. workers is employed abroad in and lives on the domestic, so his income flows from abroad to domestic households) and vice versa can domestic factor income of the company abroad flow (e.g. Guest workers in the domestic take your wages/salary, with abroad). In addition, savings from abroad to domestic capital gatherers flow (for example, specifies the money abroad in the domestic market to, to get to interest income), or savings from the domestic households abroad (for example try nationals abroad to generate higher interest income). The most important part in this economic cycle is the (positive/negative) net exports. This results from the two currents Export and Import. For example, if the exports exceed imports, it is a positive net export in the country, i.e. it flows in addition to the domestic money from abroad (net exports). Conversely, a negative net exports before, if the exports are less than the imports (current account deficit). The money supply in the domestic fall since flows money abroad. An economic cycle with the household sector, the state and abroad is known as open.