1. ECO 285 The Circular Flow Model
Dr. Dennis Foster – Spring 2014

2. Additional References
Wikipedia on the Circular Flow of Income
St. Louis Fed video
The circular flow model critiqued
YouTube video

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. GDP & Data GDP = Income = C + I + G +(Ex-Im) NBER business cycle page
FRED recession graph
Economic Report of the President

12. ECO 285 The Circular Flow Model
Dr. Dennis Foster – Spring 2014