Here Are The Relevance /Importance of The Cricular Flow of Money.
In the modern economy, money is a
form of the living hood, and the circular flow gives a clear picture of the
economy. The government, business firms, and consumers can detect whether the
economy is working strongly or has a problem by looking at the circular flow of
money.
We are going to discuss the
importance of the circular flow of money in every country's economy.
1. It creates a network of
markets:
The producers and consumers
connect through the circular flow of money because it helps to create a network
for different goods and services, where the problem related to their sales and
purchase are looked into. The network they share makes it easier to answer
their numerous questions.
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2. Basis Multiplier: When
leakages exceed injections in the circular flow of money, the total money
supply becomes less than the total output. This leads to a cumulative decline
in employment income, output, and prices over time. However, if injections into
the circular flow of money exceed the leakages, the money supply is an
increase in the economy. This leads to a cumulative rise in employment, income,
output and prices over some time.
3. Relevance of Fiscal
policy:
The circular flow of money also
points toward the importance of fiscal policy. For the circular flow of money
to be in equilibrium, saving plus taxes (S+T) must equal investment plus
government expenditure (I+G). However, S+T represents leakages from the money
stream, so if S+T exceeds I+G, deflationary tendencies develop in the taxes and
by increasing government expenditure.
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4. Basis of the flow of capital
account:
The circular flow of money help
in circulating national income based on the overflow of funds accounts. The
flow of funds accounts is concerned with all transactions in the economy that
are accomplished by money transfer.
5. Link between producers and
consumers:
The circular flow of money
established a link between the producer and the consumer, it is through money
that a producer of goods and services employs the factors of production with
which the consumers in turn purchase goods from the producers.
6. Inflationary and
Deflationary Tendencies:
The economy is affected by
leakages it injections in the circular flow of money, for example, saving is a
leakage out of the expenditure stream. If saving increases, this depresses the
circular flow money, given the supply of not in the economy, this tends to
reduce employment, income and prices, thereby leading to a deflationary process
in the economy. On the other hand, consumption expenditure and investment are
injections in the circular flow of money, which tends to increase income,
employment, output, and price.
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7. Importance of trade
policies:
Similarly, imports are leakages
in the circular flow because they are payments made to foreign countries. To
stop it, the government adopts such measures as to increase exports and
decrease imports. However, the circular flow of money points toward the
relevance of adopting export promotion and import control policies.
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section is you have any.
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