Economic Resonance 4: Simplified Model of the Economy

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An Economy

In Figure #3A, we see that the model presented above can sit in for an extremely simplified model of the Private Economy as a whole, particularly when it is a consumer driven economy such as ours.

Again, capital flows from sales into production with a portion going to labor, which now captures a portion of the Raw Materials/Components costs (at least the proportion spent in the country). Even though this is not a single corporation, still profits flow to retained earnings and shareholders in general.

Fig. 3A - Simplified Model of Private Economy © 2015 jmmxtech

Fig. 3A – Simplified Model of Private Economy
© 2015 jmmxtech

Circulation

Figure #3B is demonstrates how the flow of capital circulates within the private economy. While this focuses on the consumer side of the economy, it is this ultimate purchasing by real people that also drives most corporate purchases of equipment as they are acquired to support production either directly (production equipment) or indirectly (business computers, transportation, etc.). So a large portion of non-consumer production would merely be other circles connected to the main cycle, but still driven by the same sales revenue.

(Note, we are not discussing any of the public sector economy here.)

Fig. 3B - Simplified Model of Private Economy © 2015 jmmxtech

Fig. 3B – Simplified Model of Private Economy
© 2015 jmmxtech

The red circle in Figure #3B shows this flow – this circulation of dollars through the private economy. In fact, it is precisely this circulation that drives the economy. As in the human body, this circulation of capital is precisely the “life blood” of a capital economy.

This brings up an important question. If the money cycles, yet some is taken off to profits, then why does the system not run out of capital and grind to a halt?

The answer to this is the creation of value.

<<-Previous | Home | Next->> Creation of value

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