The Circular Flow Model

Macro Economics Essay
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The circular flow model
The circular flow model a model that explains the movement of through the hands of the different economic agents, and at the basic levels there are households and firms. Real flow is the actual flow refers to the factors of production, and to goods and service, while monetary flow is the flow of money from one agent to another in exchange for the factors of production or goods and services. A simple version of the model where there is a closed economy with no exchange of goods with the outside world as there are no imports or exports. In this scenario that the economy is made up of firms that produce and hire workers and households that buy products.
House-holdsFirmsFinancial Intermediaries GovernmentFactors Wages<  Revenue Goods & Services (Cd)Net Tax G SEconomic Growth: Fueled by Innovation & ideas  I  K  z+ => MC↓  MR>MC (profit opp.) Y↑  factor demand↑  wages↑ => consumer welfare↑ since more output to buy, more income to use (BGP) => C↑ w/out more work: Ui = f (c,l); CW = ΣaUi Standard of living = CW t∞ BROW  Central Bank   MsXM
Source: Lecture Slides
On the right side, there are firms that pay salaries to people in exchange for work. They pay a few rents to the owners (land), and they pay interest to those who lend them money (capital). On the left side, there are households or families that go to the factor market offering work, land and capital. In return they receive salaries, rents and interests that, previously, have been paid by the companies. Additionally, households use the income they earn in exchange for obtaining goods and services when they pay for them, and this goes to the firms that avail goods and services in the market (Greenlaw & Shapiro, 2011). In the middle, is the government, whereby the state receives tax revenue redistributes it in the form of pension, grants and various social welfare payments.
Besides the firms and households considering the public sector and trade provide insights on the applicability of the model in the public sector, there is intervention, public investments and redistributing income. Public expenditure is financed through taxes or issuance of public debt. When there is foreign trade there is production of goods and services for exports and imports where the households, businesses and the public sector consume (imports) or demand goods and services from the system (exports). The product market has goods and services while the factor market has labor capital.
Inflation
Inflation is rate of change in the average price level in an economy where the purchasing power of money deteriorates over time (Greenlaw & Shapiro, 2011). To measure inflation, changes in the price index for a basket of goods are considered. The explanatory theories are mostly grouped into either grouped: into those that consider that the origin of inflation is due to excess demand (demand inflation) or those that consider that the problems origi...