Circular Flow Diagram - Free Examples and Templates Download

What's a circular flow diagram?

The circular diagram (also called the circular model) is perhaps the easiest diagram of economics to understand. Even most children can understand its basic structure from personal experience. The circular diagram essentially displays the relationship of resources and money between firms and households. The basic circular diagram consists of two sectors that determine income, expenditure, and output: flows of physical things (goods or labor) and flows of money (what pays for physical things). A circular diagram depicts the inner workings of a market system and specific portions of the economy making it quite commonly used in a wide variety of presentations.

Why circular flow diagram is important?

1. It visualizes information in a clear and predetermined way and allows you to follow the flow of money through the system in economy.
2. The circle is considered to be the symbol of infinity and perfection. The circle has throughout history played an important role in art and aesthetics.
3. It provides a basis for organizing the wide array of macroeconomic indicators.
4. It helps one better understand the aggregate supply - aggregate demand model.