Circular Flow Diagrams
Circular Flow Diagrams
Introduction Money flows into and out of the economy. The circular flow diagram explains how money moves through the economic system involving households, businesses, the government, and foreign agents (Editorial Board, 2011). Circular flow diagrams are visual models that show firms who employ workers, the workers then spend on goods produced by firms, and the money is then used to compensate the worker and buy raw materials to make the goods and the circle continues.
Closed System Closed system economies only count domestic exchanges. That is exchanges with no imports or exports from other countries. This type of economy is self sufficient. This type of economy is usually free of leakage but may have leaks. A close example of a closed system would be North Korea. North Korea is cutoff from the world’s economy. In this country most property belongs to the state, the government controls almost every part of the economy (sets production levels), the state directs all significant economic activity, is regulated heavily by the states control, financial sector is controlled by the state, and formal trade is minimal (mainly with China and South Korea) (North Korea, 2013). North Korea is a perfect example of a closed system. Things are worked out within the economy. The government has almost total control of the economy and everything that happens. Out of 186 countries with eight countries not ranking at all, North Korea comes in last at number 177 and an overall freedom score of a low 1.5.
In the closed-system economy, cash flows in and out from business and consumers within that country. Households sell resources (land, labor, capital), which become inputs to the business. The business incurs cost by paying for resources which becomes income to the households in wages and rents. On the bottom half of the closed-system circular flow diagram businesses sell goods and services to households who buy the goods and services which becomes
Introduction Money flows into and out of the economy. The circular flow diagram explains how money moves through the economic system involving households, businesses, the government, and foreign agents (Editorial Board, 2011). Circular flow diagrams are visual models that show firms who employ workers, the workers then spend on goods produced by firms, and the money is then used to compensate the worker and buy raw materials to make the goods and the circle continues.
Closed System Closed system economies only count domestic exchanges. That is exchanges with no imports or exports from other countries. This type of economy is self sufficient. This type of economy is usually free of leakage but may have leaks. A close example of a closed system would be North Korea. North Korea is cutoff from the world’s economy. In this country most property belongs to the state, the government controls almost every part of the economy (sets production levels), the state directs all significant economic activity, is regulated heavily by the states control, financial sector is controlled by the state, and formal trade is minimal (mainly with China and South Korea) (North Korea, 2013). North Korea is a perfect example of a closed system. Things are worked out within the economy. The government has almost total control of the economy and everything that happens. Out of 186 countries with eight countries not ranking at all, North Korea comes in last at number 177 and an overall freedom score of a low 1.5.
In the closed-system economy, cash flows in and out from business and consumers within that country. Households sell resources (land, labor, capital), which become inputs to the business. The business incurs cost by paying for resources which becomes income to the households in wages and rents. On the bottom half of the closed-system circular flow diagram businesses sell goods and services to households who buy the goods and services which becomes
References: Editorial Board. (2011). Macroeconomics. Schaumburg, IL: Words of Wisdom. Retrieved from http://wow.coursesmart.com North Korea. (2013). Retrieved from http://www.heritage.org/index/country/northkorea Hong Kong. (2013). Retrieved from http://www.heritage.org/index/country/hongkong Hong Kong. (2012, October). Forbes. Retrieved from http://www.forbes.com/places/hong-kong/