1.3 Circular Flow of Money

Movement and interlinkage
- Income
- Expenditure
- products
- Inputs
- Factors of production
Definition
- How money goos and services circulates within any economy
- across the various sectors
- how different components are interconnected
Key components
- Households: those who provide factors of production and receive wages, rate and interest
- Businesses: Utilize factors of productions to produce goods and services and in return get revenue
- Government: Collects the taxes from \(H\) and \(B\) and returns public services and welfare payments.
- Financial sectors: Help in the development of savings and investments by providing credit and loans to \(H\) and \(B\).
- Foreign Sector: Imports and Exports. Affects the flow in both domestic and foreign economies.
How it works? Flow:
- Income Flow
  - \(H\) provide skilled people to \(B\)
  - \(B\) provides wages to \(H\)
  - \(H\) utilize the income to purchase goods and services from \(B\)
- Expenditure flow
  - \(B\) use the revenue from sales to pay for factors of production from \(H\)
  - the investment is required for further production
- Government interaction
  - Collects taxes
  - Provide public services and welfare
  - Support households and businesses to grow
- Financial Interaction
  - Savings from \(H\).
  - Channeled into investments through Financial Institutions
  - Important for an economy to grow
- International Trade (how the above 4 interact)
  - Money flows in and out of the domestic economy
  - Through imports and exports
Importance of Circular flow of money (in an economic perspective):
- Economic interdependence:
  - Interconnectedness - all the different sectors are connected with each other
  - Flow of resources - how the resources (G&S,Money) are flow between sectors
- Policy Making
  - Use the Circular flow model to to make Informed decisions
  - Help to stabilize and develop
  - Impact Analysis: how government expenditure, taxation and subsidies affect various economic sectors
- Economic stability:
  - Identify imbalances: Disruptions like inflation, unemployment, recession
  - Stabilization measures: help in design measures to stabilize and help grow the economy
- Business Planning
  - Market insights: Insights into consumer behaviour, spending patterns
  - Investment decisions: production, investment, expansion
- Financial management
  - household budgeting: role of \(H\) to mange their finances.
  - Investment opportunity: how are the savings being channeled int oinvestment and how it influences personal financial planning
- Global Perspective
  - International trade: How in home? How in global economy? Development etc
  - Global interactions: strengthened understanding of interactions between global and domenstic. Promote stable economic growth