Answer to Question #199476 in Economics for Usama

Question

name one economic interaction that isn’t covered by the simplified circular-flow diagram

Answer 1

Economic circulation (circulation of resources and income) is a circular movement of real economic benefits, accompanied by a counter flow of cash receipts and expenditures. This is a schematic representation of the interrelated main market flows in the economy.

The simplest model of economic circulation is shown in the diagram. In this case, the market circulation includes the following blocks: 1) households; 2) firms; 3) resource market; 4) product market.

Households are viewed as the owners of all resources: labor, capital, land, and entrepreneurial ability. For the resources supplied to the resource market, the household receives cash income (wages for labor, rent for land, interest for capital, profit for entrepreneurial ability). Cash income is spent on the purchase of goods and services in the product market. Consequently, households create demand for products and services and supply in the resource market.

Firms organize the production of goods and sell them in the food market. The proceeds from sales are used to buy resources, that is, it turns into the cost of production of goods. Firms create demand for resources and supply of goods and services in the product market.

In the process of circulation, two flows are formed: 1) counterclockwise - the flow of economic resources; 2) clockwise - the flow of cash income, consumer spending, and production costs.

As you can see, information, as a product in the post-industrial economy, is not reflected in the economic cycle.