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This model is much more conservative, and thus tends to try to avoid government interaction within the system. Here, the research suggests that it "stresses the connectedness of the monetary flows" (Hannes, 2012, p 4).As such, it keeps its leakages from separating and floating out of the system, as well as providing for more inside injections that do not rely so much on outside systems, as in the case with an open model system. The model is most concerned with savings and investment in order to keep leakages from spilling out of the model system, as in the case with the open system. In this system, borrowers take credit and invest it back into the system, therefore adding elements of credit into the system as an injection. In this regard, savings is seen as an injection, not a leakage like in the open systems model. Thus, "the closed model stresses the fact that saving is not lost to the economy, it is merely rechanneled by way of the credit market. Income that is saved is actually spent, just by someone different than the person who initially earned the income" (Hannes, 2012, p 5). In this, closed systems see much less of a role for external systems and a more forecasting notion of savings as investments.
There are a number of personal examples of leakages and injections depending on each system that can help individuals understand these complicated processes further. For example, from an open system perspective, the money I save in my bank account each month is a leakage. It takes money out of my current...
Savings occur when "workers receive more income than they spend on the purchases of goods and services" and represent "the portion of a person's income that is retained or invested for us in the future," (Buck, 2008). Yet, this is seen as an injection in a closed system because that money will eventually be spent on something that will add further value and investment back into the system at a later date. Moreover, in both systems, there are also injections and leakages that I personally have a relation to. For example, the work that I put out is an example of an injection into the economy I reside in (Buck, 2008). My labor adds economic value to firms and is thus seen as an injection into the economy. My spending on goods and services is a leakage out of my own day-to-day system. For example, the moneys spent on my internet service are a leakage because I will not get that money back in the same cash flow within the system at a later date.
References
Buck, John. (2008). The circular flow diagram. Economic Perspectives. Web. http://econperspectives.blogspot.com/2008/04/circular-flow-diagram.html
Hannes, K. (2012). Circular flow models. Economics. Web. http://hannesk.com/econ/Chapter5CircularFlow.pdf
Morgan, D. (2012). Open and closed systems in macroeconomics. Education Articles. Web. http://articles.submityourarticle.com/open-and-closed-systems-in-macroeconomics-305112
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