Economic Cycle

What is Economic Cycle?

The model of the economic cycle in economics describes the exchange of goods and money within an economy. Flows of money and goods flow in opposite directions and correspond to each other in terms of value. A distinction is made between the simple, the extended and the complete economic cycle as well as the economic cycle of an open economy.

In this chapter we will show you what the economic cycle is, when it plays a role and what differences there are between the individual types. In addition, with our exercises we give you the opportunity to test your knowledge of the economic cycle immediately afterwards.

Why is the economic cycle important?

According to besteducationschools.com, the economic cycle tries to model the complex relationships between the interactions in an economy. This simplifies the economic analysis and can be used as a basis for the national accounts.

What is the economic cycle?

In the economic cycle, the exchange of economic objects between the economic subjects of an economy is represented as a model. The analysis of the economic cycle of an economy is required for the national accounts and thus also forms the basis for macroeconomics.

While the flows of money and goods denote the economic objects, economic subjects include:

  • company
  • private households
  • the state (public budgets)
  • the capital collection points
  • the foreign country

The individual models of the economic cycle are differentiated into:

  • simple economic cycle
  • extended economic cycle
  • complete economic cycle
  • Economic cycle of an open economy

Simple economic cycle (2-sector model)

Synonym: 2-sector model

The simple economic cycle only considers the interactions between households and companies. The flow of goods includes consumer goods and services on the one hand and labor, capital and land on the other.

The cash flows represent the consumption expenditure of households and the remuneration of the companies to the households. The remuneration can be expressed in various forms, for example as a salary or wage, rent, lease or interest. However, it is always a consideration for the factors of production provided by households, which is why this is also referred to as “factor income”.

Economic Cycle

Economic cycle: households and companies

In the model of the simple economic cycle, the income in the model of the simple economic cycle flows completely back to the companies through the expenditure for the consumption of goods and services. The simple economic cycle is thus closed and cannot grow.

Extended economic cycle (3-sector model)

Synonym: 3-sector model

In the model of the extended economic cycle, the possibility of household savings is taken into account.

In contrast to the simple economic cycle, households do not spend their entire income on consumption, but use part of it to build wealth at banks (known as capital collection centers). The creation of reserves at companies is also taken into account. By accumulating wealth, companies can avail themselves of loans for investments. Further income can also be generated through interest.

Extended economic cycle (3-sector model)

Complete economic cycle (4-sector model)

Synonymous: 4-sector model

The complete economic cycle describes the model of an economy in which the state as an economic subject is also taken into account.

The state pays wages and social benefits (also known as transfer payments) to the households. In addition, he buys goods and services from companies and can also save up his own assets at the capital collection agencies and take out loans. At the same time, he collects direct and indirect taxes from households and companies and by raising or lowering these taxes can withdraw or add money to the cycle. In addition, he has the opportunity to promote the company through subsidies.

Complete economic cycle (4-sector model)

Economic cycle of an open economy (5-sector model)

Synonymous: 5-sector model

The model of the economic cycle of an open economy comes closest to reality. Here, the entire economic cycle is expanded by the economic subject “abroad”. With this expanded perspective, services and goods as well as factors of production can be exported as well as imported.