Circular flow model example10/13/2023 ![]() You can also describe water cycle in terms of physical processes in a mathematical model and you can do the same with circular flow which is ultimately based on the national income identity and related macro general equilibrium models but that might be too intimidating for highschool/undergraduate 101 students. In a sense yes (except for the mindless part) because circular flow is just a didactic tool - you compare it to a water cycle and thats actually a good comparison. Thoughts: It seems to me that these circular flow diagrams are just some cutesy device that some textbook writer long ago first came up with, and which other textbook writers have simply and mindlessly stuck with. ![]() The circular flow also is a good and easy way how to introduce 101 econ students to the idea that in macroeconomics income is endogenous, I seen it also be used as illustration of how money multiplier works. The point of these is to provide birds eye view of the economy, to show students that in economics everything is interconnected (and you would be amazed by how many people do not realize that), and also it also highlights the specific interactions that occur between different sectors of an economy. A more involved versions of circular flow diagram as for example the one taken from Krugman's macro textbook that you can find below the text also include financial markets (where people can save), government, international sector and so on. However, besides that it has many other uses as well as it is an easy way of provide a bird’s eye view of all important flows in the economy.Īlso you cant judge a tool only based on its most simplified version. In this case it equates it to consumption but that is not generally true of all circular flow diagrams. As you pointed out the diagram is used to illustrate that Production (or more appropriately output) = Income.
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