Describe the goods in the circular flow, Macroeconomics

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Goods in the circular flow

  • If YR is total value of all goods going from FR to FH, then total value added from all firms in the FR box is equal to YR(they don't purchase any goods to which they add value).
  • In the similar way, if total value of all goods going from FH to FF is given by YH, then total value added from all firms in the FH box is YH- YR.
  • In the similar way, total value added for all firms in FF box would be equal to Y- YH. If we sum all the value added from all firms, we get YR+ (YH- YR) + (Y- YH) = Y.
  • This result is independent of how many "levels" or boxes we have in production process. Rather than 3 levels, we could have any number of levels and result would still hold. Additionally, a particular firm may be producing in numerous of the boxes.

 

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