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The circular flow of the economy explains how money relates to each individual within society, showing how it flows between everyone and how it can be better utilized. It is an indicator of the movement of money in society, showing how it goes from producers to workers in the form of salaries and returns to producers in the form of payment for goods and services acquired. This concept was promoted by French economist François Quesnay in the 18th century and involves families, which operate production factors, and companies, which produce goods and services.
The circular flow of the economy is crucial to calculate the gross national income and the Gross Domestic Product (GDP) of a country. It shows how money enters and sells the economy, including public spending, investments and exports. GDP is an important indicator of the economic health of a country and is used to evaluate whether an economy is in decline or growth.
There are two main types of flow in the Quesnay model: real flow, related to goods and services, and monetary flow, related to money in itself. The real flow implies production factors, such as labor and land, while the monetary flow involves the circulation of money between different economic actors. This model helps to understand how money circulates in the economy and how spending and investment decisions affect economic growth.