Circular flow of Economic Activity | Circular Flow of Income | Circular flow model

Circular Flow Model
In this lesson we will be seeing about circular flow of economic activity.
What is the circular flow?
The circular flow of income and spending shows connections between different sectors of an economy
• It shows flows of goods and services and factors of production between firms and households
• The circular flow shows how national income or Gross Domestic Product is calculated
Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production (land, labour, capital and enterprise) – for example wages and salaries going to people in work.
Circular flow of economic activity model is discussed elaborately here.
Leakages (withdrawals) from the circular flow
Not all income will flow from households to businesses directly. The circular flow shows that some part of household income will be:
• 1.Put aside for future spending, i.e. savings (S) in banks accounts and other types of deposit
• 2.Paid to the government in taxation (T) e.g. income tax and national insurance
• 3.Spent on foreign-made goods and services, i.e. imports (M) which flow into the economy
Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output)
Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.
1. Capital spending by firms, i.e. investment expenditure (I) e.g. on new technology
2. The government, i.e. government expenditure (G) e.g. on the NHS or defence
3. Overseas consumers buying Indian goods and service, i.e. Indian exports expenditure (X)
An economy is in equilibrium when the rate of injections = the rate of withdrawals from the circular flow.

Circular flow of economics is the gateway to know how GDP works.
Building up the model
We will now build up the circular flow model from just having a domestic sector and then will be adding an external sector (exports and imports) before including the financial sector which channels savings and hopefully provides the finance available to fund investment.
Circular flow of national income in four sector economy is the same as Domestic Circular Flow of Income
The Domestic Circular Flow of Income and Spending
The external sector involves businesses exporting goods and services overseas (X) and consumers and business buying imported products from other countries (M)

Circular flow of economics example is discussed in the video.
Thus flow will be in circular between The Govt, Households and Firms.
Circular flow of income economics and gdp circular flow diagram are one another same when the meaning is taken into context.
The Circular Flow of Income and Spending with the External Sector added
Circular flow with external sector

While keeping the primary parties to the circular arrangement as they were, we are now adding the rest of the world to interact with them.
They will be interacting to the circular flow
1. Imports – Where the domestic households gets Goods and services from the rest of the world where the money goes out of the system thus reducing the money available with the country.
2. Exports – where the domestic products being exported to the rest of the world thus injecting money to the system which improves the available money in the system.
Gdp circular flow model is very important for examination perspective.
Financial Sector Added to the Circular Flow Model

And at last we will be adding the Financial Sector to the circular flow system,
1. Households who have excessive amount with them will be investing a considerable amount in savings will be approaching the banks or any other financial institutions,
2. The Financial sector with the funds they got from the households will be funding the firms as Business Investments or Loans.
So this is how money is getting rotated in circular flow system, this concept mostly applicable in all countries and it plays a major role in understanding a country’s purchasing power and spending pattern.
Sometimes you may need to Explain the circular flow of economy that is circular flow of income in four sector economy which outlines the circular flow of national income.

[ankitagarwal]

Thnq so so much it was really helpful for me

[ynotfrndshp]

Sir...pls conduct telangana movement.. telangana history ..!! Classes

[appalanaiduboddu]

Please done all mains economic syllubus for upsc

[sachinpatel-zqeu]

sir there is not a complete video series for economics for ssc exams so sir please completed it based on exam...and i hope this is thee best viewed series on future..
Thanks a lot for this one

[sutariraga]

sir pls provide the information on economic survey this is a humble analyse the information that will be helpfull for all the examinations mainly for UPSC. make it as possible as earlier.

[Vandematram]

Make a video on how the gdp is calculated in detail

[sutariraga]

sir why dont u make much vedios on possible pls give a brief explanation on "economic survey" .

[nagarajuvemula]

sir what happen to daily current affairs show or weakly current show i am unable to get notifications this is from my side or our show side mistake ..pls tell me sir