ECO 285 The Circular Flow Model Dr. Dennis Foster

CF I – 2 sectors & no saving Consumption Expenditures Goods and Services Households (HH) Businesses (Bus) Factor “rental” – land, labor, capital Income to factors Real flows. Money flows.

Financial Intermediaries Factor “rental” – land, labor, capital CF II – 2 sectors & saving Consumption Expenditures Goods and Services Investment Saving Financial Intermediaries Households (HH) Businesses (Bus) Factor “rental” – land, labor, capital Income to factors Real flows. Money flows.

CF II* – 2 sectors & saving Consumption Expenditures Goods and Services Investment Saving Financial Intermediaries Households (HH) Businesses (Bus) I Investment Goods Factor “rental” – land, labor, capital Income to factors Real flows. Money flows.

CF III – 3 sectors & saving Gov’t. Taxes Government Expenditures Gov’t. G & S C Goods and Services Investment Saving Financial Intermediaries Businesses (Bus) Households (HH) I Investment Goods Factor “rental” – land, labor, capital Income to factors Real flows. Money flows.

CF III – money flows only Gov’t. Taxes Government Expenditures C Investment Saving Financial Intermediaries Businesses (Bus) Households (HH) I Income to factors Money flows.

CF IV – 4 sectors; money flows Gov’t. Taxes Government Expenditures C Imports Foreign Sector Households (HH) Exports Businesses (Bus) I Saving Investment Financial Intermediaries Income to factors Imports spending Exports spending Money flows.

Why the Circular Flow Model? 1. To show how the different sectors of the economy interact with one another. 2. To measure the level of economic 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 285 The Circular Flow Model Dr. Dennis Foster