Circular flow of income

The economic cycle is a model of an economy in which the key exchange operations are represented as flows of money and goods flows between economic agents. The idea came already on Richard Cantillon. Later, François Quesnay developed the Tableau économique. Money and goods flows correspond in value terms in a closed circuit, but run in the opposite direction.

Simple economic cycle

This model is limited to the relations between the sectors consumers and producers. The economic cycle is the main financial flows and flows of goods between the two dar. influences of government, banks, institutional investors and foreign countries are not considered.

The cash flow consists of the income and consumption expenditure of households and the income and expenditure of entrepreneurs.

In the current economic goods goods flow (goods and services ) of the company to the consumer and the factors of production ( labor, land, capital) of private households to the company.

In this approach, households represent the company's production factors, especially labor which are available and do not produce goods. For the households receive from the enterprise income (wages, interest, ground rent ). Since this is to fees for the factors of production ( wages, interest, rent, lease ), they are referred to as factor income.

The income flow back for purchases of consumer goods by households to firms. The company in turn, provide consumer goods to households. Between households and businesses so flowing two flows of goods ( factors of production, consumer goods ) and each two opposite flows of money (income, expenditure on consumer goods ). Thus, the circuit is closed, static (not growing).

Enhanced economic cycle (including lending )

The extended economic cycle includes the possibility that households do not consume all their income, but also save a part of it. Among them is any form of wealth creation and wealth management to understand, for example, reserves in corporate balance sheets. From the savings flow ( seemingly automatically ) also income, namely interest income. Interest income represents a revenue surplus, which, however, must be financed by a complementary group by overspending.

In classical teachings, it is often depicted as banks managed savings of economic agents in the form of credits awarded (theory of the classical capital market). This is indeed the case but not the case. Lending needs in the bank's balance sheet initially no offsetting position in the form of savings deposits. Paper money is created by lending ( money creation ) and destroyed by redemption ( the balance shortened ) - from the mechanics of the lending sector lending money for investment and / or consumption expenditures are private (as well as partially public ) placed temporarily ( for cash liabilities ) are available.

In an economy must (not nachfragendes ) saving money by issuing surpluses are thus compensated by total sectoral net borrowing: If, for example, not enough new loans demand (or even more credit volume repaid the new loans ), the economy are simply not enough funds ( sinking demand ) to disposal ( other things being equal ) because the money for loan repayment (excluding interest) does not flow back into the cycle again.

So can not be financed investment plans due to lack of bank loans, decreases economic activity, companies reduce their expenses and therefore reduce the amount of income within the economy.

If no reduction in the deviation from the overall economic output DC step takes place ( and cumulative surplus revenue, so money saving assets are not reduced within each economy), it is necessary to ensure the smooth process of growth of the economies to force debt-financed investment even by extending the means of payment in circulation.

If the cash flows between the private non- entrepreneurs and the private company considers macroeconomic in a closed economy, a budget gap of the company is in any case can be seen in the amount of surplus revenue of the private non-enterprises and thus financing needs - thus would (if the company is not in the amount of the financing gap ongoing debt itself or is not offset by other sectors) the economic cycle is interrupted ( ex post).

Investments of entrepreneurs ( business to business )

Each additional investment within the corporate sector increases the income of another entrepreneur, bringing this, the income from the investment of the first receives, in turn, can make investments and another company can generate from income - so far, if the totality of the business, so this in the output lockstep make investments financed their additional investment even themselves and thus arises the company ( among themselves ) it is no credit required. Wilhelm Lautenbach formulated this apparent paradox also as follows: "The demand of the entrepreneur is not a function of their income, but their income is a function of their demand. "

Forming the company increased reserves (savings on the expenditure), this affects the economy certainly cooling and is continues, although more households decreased revenue ( in relation to the usual level ) achieve and even start ( due to the reduced revenue levels ) in their restrict spending.

Full economic cycle ( including government )

The state influenced the economic cycle in several ways. On one hand, he takes a tax and social contributions from business entities. Both households and businesses pay direct and indirect taxes. On the other hand, he pays income (wages and transfer income ) to households and makes for the company purchases ( government consumption ), where he also has the ability to provide subsidies to companies. Here the flow of money is no direct consideration over in the form of goods flow.

The relationship of the state to the banks illustrate the ambivalence of government activities. Assigns an economy in which borrowing by the private sector in relation to usual prior periods on a downward trend and the output decline is not offset by dissaving, so can government borrowing ( domestic / foreign) to strike a balance.

Economic cycle of an open economy

In this economic cycle is added taken abroad to the existing sectors of the sector. It can affect every household sector. Households, for example, receive foreign factor income (such as worker is employed abroad and lives in Germany, so his income flows from abroad to domestic households ) and, conversely, domestic factor income of the company will receive abroad (eg guest workers domestic take your wages / salary with abroad ). Furthermore, savings services from abroad to the domestic financial intermediaries flow (eg, the level sets money at home to earn interest income), or saving benefits of the domestic households abroad (eg try nationals abroad higher interest income to generate ). The most important part in this economic cycle is the (positive / negative ) net exports. This results from the two streams export and import. For example, if exports exceed imports, the result is inland a positive trade balance, ie additional money flows from abroad into the country ( net export). Conversely, there is a negative trade balance, if exports are less than imports ( current account deficit ). The money supply in the domestic sinks, as money flows abroad.

An economic cycle with the sectors households, government and abroad is referred to as open.