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.


                                                    photo credit:istockphoto.com

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.

photo credit: firstbanknigeria,com


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.

photo credit: istockphoto.com


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. 

Leave a question in the comment section is you have any.

 


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