CMRC TUBE

1- Definition of circular flow.

2- Why the money flows go up & down in U.S?
3- What is the multiplier effect?





1- Definition of circular flow

- The most important force affecting all of society is circular flow "continuous exchange of goods & services for money among the participant in an economic system.

1- Goods & services flow from business to households; households generate a return flow of money as compensation for these goods. Goods & services also flow from business to other businesses.


2- Government provides goods & services to households & business, which send a return of money in the form of taxes.


3- At the same time, households provide services to businesses in the form of labor & receive a return flow of money in the form of wages & salaries.



2- Why the money flows go up & down in U.S?

- The flow of money also involves savings & investing as a group, people in the U.S have historically saved approximately 5% of their household income. This money is invested in bank accounts, stocks, bonds, & other forms of savings.


- Many economists are concerned because people in the United States tend to save a smaller parentage of their incomes than people in other countries. This tendency means that U.S companies have a relatively harder time financing expansion. The household savings rate in the United States has declined in the last few years.
- As a business becomes more international in scope, the flow of capital, labor, raw materials, goods & services is taking in a global dimension. Companies in U.S employ foreign labor, build plants in other countries, sell their products abroad, and obtain capital from foreign investors. As a result, the flow of money is becoming increasingly dependent on decisions & events over which U.S companies have relatively little control. Thus U.S prosperity or lack of it- depends on what happens in places like Japan, Germany, Saudi Arabia, Poland, China, Mexico, and Canada.


3- What is the multiplier effect?
- The circular- flow shows that all elements of the U.S economy are linked. Because of the international relationships, any change in one part of the economic system creates changes elsewhere. The multiplier effect "chain reaction where by a change in one economic variable affect other variables, resulting in a ripple of changes throughout an economic system" ex: when U.S government defense spending began to drop in the late 1980s, California lost an estimated 330,000 aerospace & defense industry jobs.

                                                                         To be continued