The Circular Flow Theory

TheCircular Flow Theory


TheCircular Flow Theory

Inthe article by McMillan, theevidence connectingto the circular flow model is the issue of dead money, as addressedby Mark Carney. Carney talked about the issue while issuing a pressconference to the CanadianAuto Workers union. He referred to the $600 billion, which wasunused, and was held by the non-financial Canadian companies. ManyCanadian corporations began to hold cash reserves after the financialpredicament in 2008 to hedge against the risky global economy. Thecircular flow model involves exchanges characterised by the flow ofgoods, money, and services among the economic agents. The dead moneyphenomenon is against the circular flow model because it breaks theclosed circuit of flow of goods and money by holding the idle cash,instead of investing it to earn returns to the investors.

Thecircular flow model providesclarityof the article by giving an explanation on the interdependenceof activities in the economy, for example, the production of servicesand goods, and the income created from the production. Due to theinterdependence, dead money phenomenon is understood as holding cashdue to uncertainties by the non-financialCanadian companies, which led to lesser income, as production isdirectly proportional to income. Investors invest with theexpectation to have profitable returns, and not to have their moneyheld due to uncertain economic conditions.

Myperspectiveconcerning the working of theeconomy has changed,due to the limited economics we have covered. This is becausecurrently, I know the economy works in a closed circuit manner toallow the flow of goods and money in the opposite directions.Disturbances in any of the factor in the economy lead to imbalancesas the factors are interdependent.


McMillan,C. (2016). “Dead Money” &amp The Circular-FlowFallacy.& from