Circular Flow Diagram

Week 1-Discussion 1-Circular Flow Diagram To first explain how the circular flow diagram relates to the current economic situation, one must realize that the two, three, and four sector models no longer apply to the United States any more. Only the five sector model currently applies. The five sector model of the circular flow of income is a more realistic representation of the economy and has a more definitive look as to what and how economics really is in the world. In the more simplistic two sector model (or pure market economy), there are only the households and firms that work in conjunction with one another and represent the product and resource market. Where as in a more current updated model of the five sector model, there are the additions of banks, government, and exports. All things being equal, the five sector circular flow of income model reaches a state of equilibrium when the total of all leakages (in most cases in form of savings) and injections this can be represented as: Savings + taxes +imports=investments+ government spending +exports By the same token, there can also be disequilibrium. This can happen when the levels of income, output, expenditure, and employment will fall. This causes a recession or a contraction in economic activity. However, if levels of income, output, expenditure, and employment rise, then this causes a boom or expansion of economic activity. An example of how my families interact with the product market, we purchase goods and services from the firms that provide them. For example, grocery store purchase, repairs to vehicles, and making purchases that benefit quality of life. And as an example of how my family interacts with the factor (resource) market, this business that pay our salaries, provide benefits, and affords us the abilities to be able to purchase the goods and services that we need or require.