Circular flow of income
Exchange
• Feature of all economies
• Barter economy is the exchange of goods of perceived equal value
• Only efficient when there are few individuals and goods
• Barter is impossible when there are a lot of goods
• You need to find buyers who simultaneously want your good double coincidence of
wants
• Money is medium of exchange of goods and store of value
Aggregation
• It is only possible to add values of commodities if they are expressed in monetary terms
• Many transactions take place only in monetary terms e.g. transfer payments like benefits and
tax payments
• To simplify the national economy adding up is essential
Circular flow
• This is assumed to be a closed system, there are no leakages or injections
Quesnay divided society into 3 classes, landlords artisans and farmers
Landlords- receive all their income from rent and spend it on food and luxury goods
Artisans- receive income from the sale of manufactured goods, purchase on food. their net
surplus is assumed to zero
farmers(productive class since they are able to reinvest every year)- receive income from
landlords and artisans from sales of food, pay rent to landlords
interpretation of quesnays model
• It assumes there is no economic growth, so each year is identical
• You can’t tax the farmers, since this would lead to a reduction in agricultural surplus
• An increase by landlords will also decrease surplus
They weren’t used by classical economist
1. They had a much broader definition of productive workers
2. It takes a static view of the economy, which doesn’t include economic growth
The modern circular of flow
Capital formation are things such as tools and cars
• This looks at functional groups not social classes: firms (produce goods) and households
(consume goods)
