Economic Cycle

The economic cycle is a conceptual design and a tool for improving the detection, presentation and examination of goods and money movements in the economy.

The idea of the economic cycle will help to understand the relationships in a division of labor economy and to illustrate.The general picture of a closed cycle is transferred to the economy: cash flows and flows of goods of a certain strength and direction flow between households, companies, banks, the state and foreign (the so-called cycle poles).

In theory, there are four types of economic cycles normally.

  • Simple economic cycle
  • Expanded economic cycle
  • Complete economic cycle
  • Economic cycle of an open economy

Economic cycle (2-sector model)

2 sector model - economic cycle

Here only two sides (companies and households) are considered under the following conditions:

  • A closed economy, that is, no intervention from abroad
  • a stagnant economy, ie without growth
  • No intervention by the state, Laissezfaire
  • Income = expenditure, ie no saving or investing of households and enterprises

In this highly simplified economic cycle, households provide companies the factors of production (labor, land, capital, education) and gives reversed their income on consumer goods and services of the companies.

Companies pay households income for the factors of production and provide the households, consumer goods and services available.

The expanded economic cycle (3-sector model)

3 sector model - economic cycle

Here is the simple economic cycle of households and firms to institutional investors (banks and other ways of capital reserve formation, eg insurance ) expanded.


  • A closed economy, that is, no intervention from abroad
  • No intervention by the state, Laissezfaire

As a result, companies and households have the opportunity to save capital or to generate loans / loans for investments. It is assumed that the consumption of households (saving money) is equal to the investment of companies, by investing and the resulting possible economic growth, this 3-sector model is also called a dynamic economic cycle. Through the capital collection points the money stream is increased by the factor interest, this electricity flows to the households and enterprises in saving.

The complete economic cycle (4-sector model) without foreign countries

4 sector model - economic cycle

In the case of a complete economic cycle, the extended economic cycle is expanded by the factor “state”.


  • A closed economy, that is, no intervention from abroad

The state intervenes in the national economy by paying social wages and employers’ wages, taxing households and businesses, consuming goods and services from companies, subsidizing companies, and extracting or feeding money into the economic cycle, for example by lowering or raising taxes.

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

This is the real economic cycle, the 4-sector model is extended to the outside world and thus the 5-sector model.


  • An open economic cycle

Through the intervention of foreign countries, goods and services and factors of production are imported and exported.


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