Circular Flow of Economy

|This article explains how an economy can become in a disequilibrium and how recessions and booms happens in a market economy. |
|The circular flow of income model is a model used to show the flow of income through an economy. Through showing the leakages in|
|the economy and the injections, the different factors affecting the economic activities are apparent. Just like a leakage in a |
|fish tank a leakage in the economy leads to a decrease in economic activity. |
|And just like an injection into a fish tank where the water level rises, an injection in an economy leads to an increase in |
|economic activity. To understand how the circular flow of income can be used to show disequilibrium in the economy you must |
|first understand what disequilibrium is. Disequilibrium is the state where economic activity is not equal, that is where |
|leakages > injections or when leakageswhereas the state of equilibrium is when leakages=injections. Hence disequilibrium is |
|when the savings are either greater or less than the investment. |
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|The basic circular flow of income model consists of six assumptions: |
|The economy consists of two sectors: households and firms. |
|Households spend all of their income (Y) on goods and services or consumption (C). There is no saving (S). |
|All output (O) produced by firms is purchased by households through their expenditure (E). |
|There is no financial sector. |
|There is no