# Circular Equation : Circular Flow Models Essay

1138 WordsNov 8, 20155 Pages
520 THE ECONOMIC ENVIRONMENT SEMESTER 02 2015 ASSIGNMENT TIMUR TOTIKOV ID:703765 Question № 1: Circular Flow Models Q1.1 An economic model attempts to abstract from complex human behavior in a way that sheds some insight into a particular aspect of that behavior. This process inherently ignores important aspects of real-world behavior, making the modeling process an art as well as a mathematical exercise. The expression of a model can be in the form of words, diagrams, or mathematical equations, depending on the audience and the point of the model. Q1.2 The level of economic activity in any economy may be represented as a circular flow of income and expenditure between five sectors in the economy. These sectors are households, business, government, capital and the external trade sector. Q1.3 Q1.4 Five sector circular flow model Import payments (M) are a withdrawal from the economy whereas export receipts (X) are an injection back into the economy. Similarly the imports come into the country but the money we pay for them flows out of the economy. Households use part of their income to pay tax (T) and save (S) Business sector import goods from overseas (M) These three flows T, S and M are withdrawals from the economy. However, while the government withdraws money from the economy in the form of tax, it also injects money back into the economy by spending on goods and services (G). When the economy is in equilibrium total withdrawals from the spending stream