![]() ![]() ![]() Households, the primary consumers, allocate resources, primarily labor and capital, to firms, thereby facilitating production. The Two-Sector CFM, the most simplified version, comprises two principal entities: households and firms. The Basic Circular Flow Model Two-Sector Model Through the ages, the CFM has undergone numerous modifications and refinements, mirroring the complexities and nuances of developing economic systems and theories, culminating in the multifaceted model employed by economists today. Subsequently, the model was refined and expanded by illustrious economists, including Adam Smith, John Maynard Keynes, and others, each contributing unique perspectives and insights aligning with their economic theories and the evolving economic landscape. Quesnay’s work reflected the circulation of money and goods within an economy, laying the groundwork for future economic modeling. The model’s rudimentary form can be traced back to François Quesnay, a French economist of the Physiocratic school in the 18th century, who devised the Tableau économique. The inception of the Circular Flow Model is attributed to the seminal work of early economic thinkers who sought to represent economic activities systematically. By dissecting its foundational principles and real-world applications, the ensuing discourse seeks to provide readers with a robust understanding of CFM’s enduring significance and practical utility in economic analysis. This paper aims to meticulously explore the CFM, elucidating its development, variations, applications, limitations, and relevance in contemporary economic discourse. Through a lucid diagrammatic representation, CFM demystifies how income, production, and consumption are intricately intertwined, serving as an indispensable tool for students, economists, and policymakers alike to apprehend economic processes and craft informed decisions. It unfurls the dynamic flux of money and goods/services between households and firms, representing a foundational concept in economic theory. The Circular Flow Model (CFM) offers an elemental visualisation and analytical framework in the field of economics, elucidating the complex interactions within an economic system.
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