The economic circuit is a simple graphic representation of the real (goods and services) and monetary ( money and securities) transactions that occur in a market.
Thus, an economic circuit presents in an image the main flows of merchandise and payments generated between three key actors: families, businesses and the State.
The basic agents of the economic circuit
Next, we describe the main characteristics and activities of the three basic agents of the economy:
- Families: They are defined as the set of people who live under one roof, whether or not they have a kinship relationship. A family can even be formed by a single individual.
Families earn income either from their work or from the income of their assets. In addition, in some cases they can receive aid (goods, services or money) from the State without it requiring anything in return.
Families use their income and transfers in three activities: they consume goods and services, save for the future and pay taxes and / or social fees.
- Companies:These are organizations that seek to make a profit through the sale of goods or services.
Companies combine factors of production (technology, land, labor and capital) to manufacture the products that will be offered in the market.
Companies are related to families because they pay for the use of productive factors . Thus, they pay, for example, with wages to workers and with rents to landowners.
- The State:It is a political organization that has the power to sovereignly administer a specific geographical space.
Part of the role of the State is to produce goods or services that serve society (both families and businesses). We refer, for example, to health or education systems aimed at those who cannot pay for them.
Similarly, the State manages services such as administrative procedures (issuance of visas, certificates, among others).
It should also be noted that, to finance its activities, the government collects taxes from families and businesses.
Economic circuit chart
As part of the economic circuit, families pay for the goods and services that companies produce.
In addition, companies also pay families for the work or assets they offer. Thus, they remunerate employees with salaries, with interests to savers or investors, and with rents to owners of rented land or personal property.
Families and the State also relate. Families pay taxes to the government, while the latter delivers goods, services and social assistance.
In the same way, companies and the State are linked together. Companies pay taxes to the government and it offers them goods, services and in some cases subsidies or supports.