Simplified circular model

The simplified circular model is a form of the economic circular model in which the state and foreign trade play no role. Only the business units companies (productive business unit) and households (consuming business unit) exist .

In the cycle model, only money flows and not goods flows are considered. The following terms are used:

National income (abbr. ): Sum of all labor income and corporate and property income in an economy ${\ displaystyle Y}$
Consumer spending (abbr. ): Expenditure on consumer goods on the part of households ${\ displaystyle C_ {H}}$
Replacement investments (abbr. ): Replaced items ${\ displaystyle I ^ {e}}$
Net investments (abbr. ): Investments by companies in themselves, mostly by granting loans or the like. ${\ displaystyle I ^ {n}}$

Household savings (abbr. ): Wage shares saved by households

{\ displaystyle S_ {H}}

If the model is in equilibrium, it is often wrongly assumed that the flows of money to the sectors always correspond to the flows of money away from the sectors. Due to the real practice of money creation by commercial banks for lending , this is only partly the case.

That means

${\ displaystyle Y = C_ {H} + I ^ {n} = C_ {H}}$

and, since revenue surpluses (S) result from previously posted debt (I):

${\ displaystyle I => S}$

I = S is what is known as Keynes ' investment equation. The statements of the Keynesian investment equation:

At the end of an economic period, and are equal. ${\ displaystyle S}$ ${\ displaystyle I}$
In a closed economy , wealth (macroeconomic) can only be built in real form through the production of goods that are not consumed in the household sector.

However, since in reality the case that planning and actual values are the same occurs very seldom (due to the slight influence of determinants such as interest rate, sales expectations or income distribution) one of two equalizations takes place:

The price equalization:
If, contrary to expectations, the demand from households should be greater than the supply from companies, they will raise prices until the reduced demand corresponds to supply again. This leads to involuntary savings by households.
The real
balance : if, contrary to expectations, the demand from households should be greater than the supply from companies, the companies increase their stocks of consumer goods (by reducing their inventory, for example, which corresponds to a reduction in investments) until the demand can be satisfied. The reduction in inventories by companies means negative unplanned investments.

Simplified circular model

See also