Reference no: EM131246482

The circular flow model depicts the exchange of money, products, and resources between households and businesses. It includes the factor and the products markets. The firms demand factors necessary for production of goods and services i.e., natural resources, labor capital and entrepreneurship, while households use compensation they receive for these factors (money paid) to purchase goods and services from the product market. Business cycles refer to irregular up-and-down movements of total production and other measures of economic activity. Business cycles are erratic, and their duration and intensity vary. Business cycles comprise of two phases, expansion (business activity surges and GDP increases until it reaches a peak) and recession (a period of economic decline); and two turning points, peak (highest point of real GDP that has been attained up to a certain time) and trough (a low point from which a new expansion begins). When an economy is experiencing an expansion, unemployment declines, prices generally rise, and the economy grows. Once the economy has attained maximum allowable output, a peak is reached and employment is at or at above full employment level. A peak is usually followed by a correction phase in which contraction occurs, growth slows down, and employment and prices decline. This trend continues until the economy reaches a trough.