![]() This is true for all transactions: as individuals and firms buy and sell goods and services, money flows among the different sectors of the economy. The idea is the same either way.) There is a flow of money from you to the seller and a flow of goods or services from the seller to you. (You might literally hand over dollar bills and receive a CD, or you might enter a credit card number into a website entitling you to a download. When you purchase a piece of computer software, you give money to the seller, and the seller gives the software to you. There are two sides to every transaction. ![]() This relationship lies at the heart of macroeconomic analysis. From a simple version of the circular flow, we learn that, as a matter of accounting, gross domestic product (GDP) = income = production = spending. The circular flow of income describes these flows of dollars. Toolkit: Section 31.27 "The Circular Flow of Income"Īs individuals and firms buy and sell goods and services, money flows among the different sectors of the economy. To understand the circular flow, recall our working definition of economic activity: “goods and services produced for sale.” So far, we have focused on production. One of the most important is called the circular flow of income The money flows among the different sectors of an economy as individuals and firms buy and sell goods and services. We need frameworks to help us make sense of the data that we gather.Įconomists use many different kinds of frameworks to make sense of an economy. Measurement of the economy tells you what has happened, but it tells you neither why it happened nor what it means. As yet, though, you do not know anything about either the causes or the consequences of these events. You also report that there was a recent increase in the price level. You report back to the International Monetary Fund (IMF) team that production has been declining in recent years. Looking at some basic measurements of the economy has allowed you to be more concrete about the problems in Argentina. After you have read this section, you should be able to answer the following questions:
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