If the essential exchange processes between two economic objects are represented as flows of money and flows of goods, the economist calls this model the economic cycle. Both movements correspond to each other in a closed economic cycle, but they run in opposite directions between households, companies, banks and states.
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Simple economic cycle
There are two actors in the simple economic cycle, namely the private household and the company. Businesses provide work to the household and pay it wages, with which the household in turn buys consumer goods and services from the company. This is called the flow of money in economics.
In the flow of goods, households receive labor, capital, for example, through the purchase of shares, education and land, whereby the companies are able to offer their goods and services. The prerequisites for the simple economic cycle are:
- a closed economy
- a stagnating economy
- the state does not intervene
- no saving and investing
Extended economic cycle
The expanded economic cycle also includes capital such as banks and insurance companies. It is assumed that households do not only spend their money on consumer goods and that companies do not only invest their generated income in wages and salaries.
The banking system manages household savings and grants them and businesses credit for investment. The flow of money is expanded by the interest paid to households and companies when they save. When a loan is taken out, the capital flows back to the banks in the form of interest.
This three-factor system is also called the dynamic economic cycle. In summary, one speaks of an expanded or dynamic economic cycle if the following points are met:
- closed economy without foreign intervention
- no state intervention
Complete economic cycle
In the complete economic cycle, the state factor is added. He gives money in the form of social benefits. In addition, the state is an employer from whom private households receive wages and salaries, provided they work in state institutions.
The state receives taxes from households and companies and receives goods and services from companies. By lowering and raising taxes and subsidizing companies.
A complete economic cycle is a closed economy without foreign intervention.
Economic cycle of an open economy
Foreign countries come into play here as a fifth factor, which intervenes in the economic cycle through the import and export of goods, services and workers.