Learn about the types of flows that make up this model and the agents involved in it.
We explain how fluctuations in the circular flow of income affect the economy.
The relationship between different economic agents generates a circular flow , in which some sell and others buy. But at the same time, sellers are also buyers and buyers are sellers. That is, the czechia email list money that consumers pay to entrepreneurs for the purchase of goods and services returns to them in the form of wages, rents and profits.
It is important to note that in Northern European countries with higher wages, the balance of the circular flow of income is balanced at a higher point. Because workers have more money, the internal consumption of goods and services produced by entrepreneurs is boosted.
At the other extreme are countries with lower wages, whose workers cannot draw as much on consumption. They therefore have to balance their circular flow balance with income from abroad , such as from tourism , real estate or exports.
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Types of flows
The concept of the circular flow of income was first coined in the 18th century by François Quesnay . Quesnay, a physician by profession, compared the circular flow of income to the movement of blood through the human body.
According to Quesnay, there were two types of flows in an economy:
Real flow : Refers to the factors of production, as well as goods and services .
Monetary flow : It is what generates the movement of money when it moves from one agent to another, when they exchange factors of production or goods and services.
When we shop at a supermarket, both flows occur, the real one for the purchase of the products we buy and the monetary one for the money we pay.
What agents intervene in the circular flow of income?
The following agents may participate in the circular flow of the economy:
Companies . They produce goods and services, generating jobs that pay salaries.
Domestic economies . These are people and families who go to the factor market offering work, land and capital, and receiving salaries, rents and interest from companies in return.
Public sector . It acts as a regulator of the system, collecting taxes to distribute wealth through subsidies, pensions and grants. In addition, it also offers public goods and services such as education, health, infrastructure, etc.
The public sector also acts as a company, as it hires civil servants to provide public services, such as doctors, teachers, firefighters, etc. But it also acts as a consumer, as it buys goods from companies, just like families do. For example, the computers used by civil servants. Therefore, companies, in addition to selling to families, also sell to the State.
Foreign sector . Imports and exports also influence the circular flow of income, increasing or decreasing it. This happens because when we buy goods and services from other countries, money flows out of our country to the country from which we are buying. This translates into a decrease in the circular flow of income in our country, since there will be fewer resources for domestic consumption.
On the contrary, when we sell our goods and services to other countries, there is an inflow of money from the country to which we are selling our goods and services. In this way, more resources are generated for the purchase of goods and services in our country. This is why all states try to promote exports.
