The Circular Flow
The American free enterprise (capitalist)
system is a wonder of wonders. Just how do we ensure that all of our
citizens needs are provided for? How do we make sure that we produce
what we need and that those goods are allocated fairly
(distribution). Of course I am referring to the three basic economic
questions. So, just how do we ensure they are being answered
properly. Well, the reality is, we don't!
In America, and in all basically capitalist
systems we rely on a rather complex theoretical model to tell us this
whole free enterprise thing works. This model is called the
Model. What the circular flow
model tells us is that three basic elements of the econmy will work
and interact together to ensure that our needs and wants are provided
There are three basic elements, or what are
referred to as sectors,
of the economy that must
interact. These sectors are:
Circular flow basically shows us that input
from each sector and to each sector spurs on production and thus
goods and services are created. Here is a graphical representation
of circular flow:
As you can see, each sector of the economy
feeds another. Households (consumers) provide businesses with
payments in exchange for jobs and goods and services. Government
provides consumers and businesses with payments in exchange for goods
and services from business and taxes and resources from consumers.
It is what is called a symbiotic relationship. We all rely upon one
Is the circular flow model complete? No, nor
is it meant to be. It is merely a theory that explains how free
enterprise works. Banks for example, a very important part of the
economy, are left out.
Some socities do not accept the circular
flow model theory. These socities, therefore, choose another
economic system other than capitalism. Socialists and communists see
the role of the government in a different light than capitalists do.
They see a government that must in some cases should provide for all
needs (command) and in other cases provide for some needs
(socialist). They do not trust that this will all just work out the
way the theory says it will.
Does circular flow work? The answer is yes
and no. Yes, in that we are a wealthy, productive society. No, in
that there are some citizens who fall through the cracks and do not
have their needs met. We try to help them and thus move closer to
socialism and increase the role of government. This is why we are
really a mixed economy and not a pure capitalist economy.
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