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Basic diagram of the circular flow of income. The functioning of the free-market economic system is represented with firms and households and interaction back and forth. [2] The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between ...
An economic model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical , framework designed to illustrate complex processes.
Phase space graph (or phase diagram) of the Ramsey model. The blue line represents the dynamic adjustment (or saddle) path of the economy in which all the constraints present in the model are satisfied. It is a stable path of the dynamic system. The red lines represent dynamic paths which are ruled out by the transversality condition.
A Robinson Crusoe economy is a simple framework used to study some fundamental issues in economics. [1] It assumes an economy with one consumer, one producer and two goods. The title " Robinson Crusoe " is a reference to the 1719 novel of the same name authored by Daniel Defoe .
Graphical representation of Keynes's economic model, based on his own diagram at page 180 of the General Theory. The first equation asserts that the reigning rate of interest r̂ is determined from the amount of money in circulation M̂ through the liquidity preference function and the assumption that L(r̂)=M̂.
The IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic model which is used as a pedagogical tool in macroeconomic teaching. The IS–LM model shows the relationship between interest rates and output in the short run in a closed economy .
Edgeworth's original two-axis depiction was developed into the now familiar box diagram by Pareto in his 1906 Manual of Political Economy and was popularized in a later exposition by Bowley. The modern version of the diagram is commonly referred to as the Edgeworth–Bowley box. [6]
The model structure basically helps in understanding how the flows are connected from a behavioral perspective or in simple words how the behavior of a sector affects the flow of funds in the system, e.g., the factors that affect the consumption (C) of the household is not clear from the flow of funds but can be explained by the model.