Circular Flow Diagrams

893 WordsDec 7, 20134 Pages
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…show more content…
With an overall score of 89.3 and ranked number 1 for the 19th consecutive year and in the 2013 economic freedom index, Hong Kong takes the top as a free open system economy in the Asia-Pacific region as well as in the world. Hong Kong participates in global trade and investments and has high economic growth and is a very competitive financial and business center (Hong Kong, 2013). The economy is prosperous as offers low taxes and light regulation. Hong Kong has a zero tariff rate and minimal non-tariff barriers. The country has an aggressive financial market and is greatly capitalized. As of October 2012 it had a trade balance of 3.9%, a GDP growth rate of 5.0%, and a GDP per capita of $34,457 (Hong Kong, 2012). Cash flows in and out from business who trade with each other and the consumer who buy from the businesses. Households and firm interact in the goods and services market as well as the factor market. Households buy goods and services while firms sell the goods and services. Households sell land, labor, raw material, machines capital, and entrepreneurship while firms buy the inputs. So, households sell the land, labor, and capital to the firms who buy it then they sell the goods and services to the households who pay for them. The firms pay wages and rents to households who pay firms for the goods and services. GDP is spending done by households that buy that goods and services produced by firms,
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