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The circular flow of income or circular flow is a model of the economy in which the major . [we may view the] economic organization as a system of prize relations. Seen in the large, free enterprise is . Therefore, since the leakages are equal to the injections the economy is in a stable state of equilibrium. This state can be. An open economy allows for more varied interplays between planned vs actual leakages and injections among countries. The key difference between the two models is that consumption is explicitly eliminated from the injections-leakages variation. Whereas the Keynesian cross.
Marx[ edit ] In Marxian economics, economic reproduction refers to recurrent or cyclical processes  by which the initial conditions necessary for economic activity to occur are constantly re-created. Karl Marx developed the original insights of Quesnay to model the circulation of capital, money, and commodities in the second volume of Das Kapital to show how the reproduction process that must occur in any type of society can take place in capitalist society by means of the circulation of capital.
In the capitalist mode of production, the difference is that in the former case, the new surplus value created by wage-labour is spent by the employer on consumption or hoardedwhereas in the latter case, part of it is reinvested in production. Further developments[ edit ] The competitive price system adapted from SamuelsonAn important development was John Maynard Keynes ' publication of the General Theory of Employment, Interest and Money.
Keynes' assistant Richard Stone further developed the concept for the United Nations UN and the Organisation for Economic Co-operation and Development to the systems, which is now used internationally. The first to visualize the modern circular flow of income model was Frank Knight in publication of The Economic Organization.
Living Economics: Injections and Leakages - Planned vs Realized
Seen in the large, free enterprise is an organization of production and distribution in which individuals or family units get their real income, their "living," by selling productive power for money to "business units" or "enterprises", and buying with the money income thus obtained the direct goods and services which they consume.
Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. September Learn how and when to remove this template message Two sector model[ edit ] In the basic circular flow of income, or two sector circular flow of income model, the state of equilibrium is defined as a situation in which there is no tendency for the levels of income Yexpenditure E and output O to change, that is: The firms then spend this income on factors of production such as labour, capital and raw materials, "transferring" their income to the factor owners.
The factor owners spend this income on goods which leads to a circular flow of income. This basic circular flow of income model consists of six assumptions: The economy consists of two sectors: Households spend all of their income Y on goods and services or consumption C. There is no saving S. All output O produced by firms is purchased by households through their expenditure E.
There is no financial sector.
There is no government sector. There is no foreign sector Three sector model[ edit ] It includes household sector, producing sector and government sector.
It will study a circular flow income in these sectors excluding rest of the world i. Here flows from household sector and producing sector to government sector are in the form of taxes.Circular Flow of Income. How the different components of an economy interact.
The income received from the government sector flows to producing and household sector in the form of payments for government purchases of goods and services as well as payment of subsidies and transfer payments. Every payment has a receipt in response of it by which aggregate expenditure of an economy becomes identical to aggregate income and makes this circular flow unending. Four sector model[ edit ] A modern monetary economy comprises a network of four sector economy these are: In a simplified closed economy with no government, households plan to save a certain amount planned leakagebut the actual saving actual leakage may be less than planned if producers do not plan to invest planned injection the same amount as the planned saving.
When the planned injection is less than the planned leakage, households are disappointed in their actual saving and try to save even more next period. If the planned investment again does not match the planned saving, the output pie will shrink even more.
Thus collectively, the economy cannot save more unless it also invests more to soak up the higher saving.
But government deficit spending i. In an open economy, planned domestic leakages need not be equal to planned domestic injections to stabilize the economy. If planned domestic leakages exceed planned domestic injections, the excess domestic output could be exported to other countries. Income going to the household sector is national income. These four parts -- consumption expenditures, gross domestic product, factor payments, and national income -- are the core of the circular flow.
They are the "engine" that drives the macroeconomy. Let's now consider how injections and leakages relate to this core circular flow. The three injections -- investment, government purchases, and exports -- can be displayed by clicking the [Injections] button.
These injection expenditures, like consumption, are used to purchase aggregate production through the product markets. Most importantly, injections add to the total volume of the basic circular flow. That is, they "inject" revenue into the product markets that is used for factor payments and becomes household income.
The three leakages -- saving, taxes, and imports -- can be displayed by clicking the [Leakages"] button. These leakages, like consumption, are how the household sector divides up or uses its income. Most importantly, leakages subtract from the total volume of the basic circular flow. That is, they "leak" income away from the product markets, making less available for factor payments and household income.
Circular flow of income
The critical implication from the circular flow is that a balance between injections and leakages maintains a constant flow of income, consumption, production, and factor payments moving between the household and business sectors. This is the essence of macroeconomic equilibrium -- the level of aggregate production remains unchanged. However, if injections exceed leakages, then the volume of the basic flow expands and aggregate production increases. Alternatively, if leakages exceed injections, then the volume of the basic flow contracts and aggregate production decreases.
As we shall see, this change in production is what moves the economy to an equilibrium balance. The Injections-Leakages Balance A balance between injections and leakages generates the same equilibrium as a balance between aggregate expenditures and aggregate production.
The intersection of the two lines is the equilibrium level of aggregate production, which matches the equilibrium level of aggregate production generated by the Keynesian cross version of the Keynesian model.
Three Variations The injections-leakages model comes in three common variations, each based on a different combination of the four macroeconomic sectors, and thus a different number of injections and leakages.
The simplest injections-leakages model includes the household and business sectors.