Circular Flow Budget
Nation-sized budgeting doesn't follow the same rules as the economics of an individual household or business.
What Is the Circular Flow Model?
The circular flow model demonstrates how money moves through society. Money flows from producers to workers as wages and flows back to producers as payment for products. In short, an economy is an endless circular flow of money.
That is the basic form of the model, but actual money flows are more complicated. Economists have added in more factors to better depict complex modern economies. These factors are the components of a nation's gross national product (GDP) or national income. For that reason, the model is also referred to as the circular flow of income model.
- The circular flow model demonstrates how money moves from producers to households and back again in an endless loop.
- The models can be made more complex to include additions to the money supply, like exports, and leakages from the money supply, like imports.
- When all of these factors are totaled, the result is a nation's gross domestic product or the national income.