The Importance Of Circular Flow Diagram
Economic models that reveal the entire cycle of production and consumption of goods and services in the society are illustrated by circular flow diagrams. Formerly known as the Wheel of Wealth, the circular flow diagram shows the basic earning and the spending that are carried out in a society for the development of the economy. The cycle of producing goods for the intention of sale and the purchase of goods for the intention of survival is the basic concept of exchange, which is ably depicted by circular flow diagrams. Since ancient times, human beings have been acquainted with these circular flow diagrams and have been benefited. People have been known to trade with goods that are surplus, in exchange for their desired goods which the other party is willing to trade with them. This concept can be illustrated and explained in the economic model of circular flow diagrams. Circular flow diagrams are especially helpful for a nation to benefit and prosper economically and sort out the problems from the core. A complex and a real life circular flow diagram deals with other factors of production rather than just the consumers and the producers. The Simple Circular Flow Diagram This is the most basic form of circular flow diagram, where several sectors that have an impact on the economy are overlooked in the illustration of the diagram. The Financial sectors consisting of the banks and mediators, the Government sector and the overseas sector concerned with the betterment of the economy are all assumed to be nil in this flow diagram. In a simple circular flow diagram, it is assumed that the only two sectors that act in the economy are the household and the production companies producing various goods and services. The economy is sustained by the consumers, who purchase goods and services in exchange for money and the producers of these products, who utilise the money to buy resources. These could also include factors of production, such as the land, labour and capital, for further production. Typically, in a simple circular flow diagram, the two markets that are emphasized during their illustration are the suppliers of goods and the consumers. The Complex Circular Flow Diagram This circular flow diagram is more detailed and reveals the realistic flow in the economy, using the other sectors that are only assumed in the simple circular flow diagram. It includes the sectors such as the export and import carried out for the betterment of the economy, the roles of the government sectors that control the other lower chains of command in the government and the financial sectors that deal with the various banks and non-profit organizations that have an impact on the economy. The addition of these sectors into the circular flow diagram enables a better and yet more realistic demonstration of the economy. However, the other two most important sectors, household and the production firms are kept unchanged. Similar to the simple circular flow diagrams, it is assumed that the economy is based on the households that purchase the goods and services and the production firms that fabricate the desired products with the help of the labour as well as the other factors of production. The money flows from one party to another, flows in a similar way for the benefit of the economy as a whole. |
