Circular flow Diagram is a visual model of the economy that shows how dollars flows through markets among households and firms. Breaking down Circular Flow Diagram The economy consists of millions of people engaged in many activities—buying, selling, working, hiring, manufacturing, and so on.

Dec 07, 2014 06.01 Research Notes GOVERNMENT Sets regulation restriction guidelines for McDonalds to follow, to promote a healthy population. Circular Flow Diagram REST OF THE WORLD Earns income and finds out how to expand the McDonald brand globally. Jul 06, 2018 In general, the circular-flow model is useful because it informs the creation of the supply and demand model. When discussing the supply and demand for a good or service, it is appropriate for households to be on the demand side and firms to be on the supply side, but the opposite is true when modeling the supply and demand for labor or another. In a closed economy, goods and services are exchanged in product markets and factors of production are exchanged in factor markets. In this video, we explore how to model this in a straightforward way using the circular flow model.

Circular Flow

The circular flow diagram pictures the economy as consisting of two groups — households and firms — that interact in two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees. To better understand the economy and the NIPAs, consider a simple economy consisting solely of businesses and individuals, as reflected in the circular flow diagram ⁽¹⁾:

In this simple economy, individuals provide the labor that enables businesses to produce goods and services. These activities are represented by the green lines in the diagram. Alternatively, one can think of these transactions in terms of the monetary flows that occur. Businesses provide individuals with income (in the form of compensation) in exchange for their labor. That income is, in turn, spent on the goods and services businesses produce.

In the real world, there are many different markets for goods and services and markets for many different types of labor.

The total economy is much more complicated than the illustration above. An economy involves interactions between not only individuals and businesses, but also Federal, state, and local governments and residents of the rest of the world. Also, not shown in this simple illustration of the economy are other aspects of economic activity such as investment in capital (produced—or fixed—assets such as structures, equipment, research and development, and software) and flows of financial capital (such as stocks, bonds, and bank deposits). ⁽²⁾

The circular flow diagram simplifies this to make the picture easier to grasp. In the diagram, firms produce goods and services, which they sell to households in return for revenues. This is shown in the outer circle, and represents the two sides of the product market (for example, the market for goods and services) in which household’s demand and firms supply.

Households sell their labor as workers to firms in return for wages, salaries and benefits. This is shown in the inner circle and represents the two sides of the labor market in which households supply and firms demand.

This version of the circular flow model is stripped down to the essentials, but it has enough features to explain how the product and labor markets work in the economy. We could easily add details to this basic model if we wanted to introduce more real-world elements, like financial markets, governments, and interactions with the rest of the globe (imports and exports).

In any circular flow diagram, two flows are present, which can be thought of as two sides of the same coin. The coin can be thought of as GDP, and the two flows are the Expenditure Approach and the Income Approach in measuring GDP. ⁽¹⁾

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DIAGRAM 14

You need to draw the Circular Arrows Diagram, Segmented Diagram or Circular Flow Diagram? Any of these diagrams can be fast and easy designed in ConceptDraw DIAGRAM.

ConceptDraw DIAGRAM diagramming and vector drawing software offers the Business Diagrams Solution from the Management Area with extensive drawing tools, predesigned samples and circular flow diagram template. The use of ready template is the easiest way of drawing.

Example 1. Circular Flow Diagram Template

The circular flow diagram template is included in Business Diagrams Solution for ConceptDraw Solution Park and is available from ConceptDraw STORE. You need only open it and fill to get the excellent result in a few minutes.

Example 2. Circular Arrows Diagram - SDLC

This sample was created in ConceptDraw DIAGRAM on the base of circular flow diagram template from the Business Diagrams solution. It shows the circular arrows diagram which illustrates the Systems Development Life Cycle (SDLC). An experienced user spent 5 minutes creating this sample.

Use the circular flow diagram template to create your own circular flow diagrams and circular arrows diagrams quick, easy and effective in ConceptDraw DIAGRAM.

All source documents are vector graphic documents. They are available for reviewing, modifying, or converting to a variety of formats (PDF file, MS PowerPoint, MS Visio, and many other graphic formats) from the ConceptDraw STORE. The Business Diagrams Solution is available for all ConceptDraw DIAGRAM or later users.

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Circular Flow Diagram Economics

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