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I would like to understand the economic system concretely. My reading leads quickly into graphs and theory, which is interesting but not what I'm looking for. Instead, I imagine I should be able to trace the path of a dollar from my pocket through the major components of the economic system (the central bank, commercial banks, investors, companies, tax, government spending, government borrowing...)

This is the closest I've found, but it is still fairly abstract and the directions of the arrows don't make sense to me. Is there a diagram for what I am describing?

Circulation in macroeconomics

Source: https://en.wikipedia.org/wiki/Macroeconomics

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  • $\begingroup$ Looks like maybe I'm looking for en.wikipedia.org/wiki/Circular_flow_of_income $\endgroup$
    – user43089
    Oct 1, 2023 at 20:24
  • $\begingroup$ the graph what you have is literally the circular flow of income... why do the arrows not make sense? The graph you have is the same graph they have on wikipedia except you have more complex version involving foreign sector and explicit dichotomy between financial and commodity market. $\endgroup$
    – 1muflon1
    Oct 1, 2023 at 22:35
  • $\begingroup$ @1muflon1 Maybe I just need to start simpler. The labour demand arrow confuses me. And I have no idea what the TRansfer arrows refer to. $\endgroup$
    – user43089
    Oct 1, 2023 at 22:58
  • $\begingroup$ Ok wait, if I follow the blue line from household all the way round it makes sense! $\endgroup$
    – user43089
    Oct 1, 2023 at 22:59
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    $\begingroup$ Transfers are subsidies, welfare payements etc. The arrow for labor demand comes from corporations because corporations are customers on labor markets and people are suppliers selling their labor on labor market $\endgroup$
    – 1muflon1
    Oct 1, 2023 at 23:06

1 Answer 1

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This is called the circular flow of income. A simple model demonstrates the exchanges between households, business and government:

Three-sector circular flow diagram

More complex models include additional economic agents such as the foreign sector (imports, exports, foreign investments) and the financial sector (banks). Some of these can be sources of money (banks can "create" money through credit).

The original image is in fact such a diagram. (Thanks @1muflon1 for pointing this out.) You probably want to start with one of the simple diagrams and add details from there.

Source: https://en.wikipedia.org/wiki/Circular_flow_of_income

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