Macro Economy Macroeconomics: Circular Open

Macro Economy

Macroeconomics: Circular Open and Closed Systems

"The behavior of a macroeconomic system is determined by the interactions of a great many actors and institutions," and the subject is an incredibly complex one to study (Hannes, 2012, p 1). Understanding money flows in an economy can get tricky, so macroeconomics has provided models to diagram the money as it flows in and out of an economy in relation to the actions and behaviors of agents and elements within that economy. The circular flow represents cash flow within an economy. Circular diagrams help us understand cash flow within an economy under the principles of macroeconomics. These diagrams allow us to understand and evaluate the way elements within macroeconomics interact with one another. There are essentially two main systems, an open and closed flow system that are unique in their elements.

The first of the two models to be examined here is the open system. In this, a short time perspective is highlighted in a Keynesian perspective (Hannes, 2012). Here, the research suggests that "elements cannot be easily determined nor predicted as there are uncertainties prevailing in the external environment," (Morgan, 2012). Thus, there is a desire for greater government involvement and interaction within the system and its relationships between the working parts. Essentially, injections from outside the system are encouraged and planned for in the systems model, as well as leakages that are allowed to float out of the model. Injections are "the part of spending that does not arise directly out of current income" (Hannes, 2012, p 4). So, they are often made up by investment, government purchases, and exports. In this structure, exports and government purchases all flow seamlessly into the open model, along with other similar external influences. Injections are spending elements which return value back into the system. There are also leakages within an open system as well. According to the research, leakages are "the part of spending that does not directly return to the product market as spending" (Hannes, 2012, p 4). In an open model, these include savings, taxes, and imports. Leakages are essentially usages of income that will not return back into the model system, and thus are separated from the model's structure. In this structure, savings is seen as a leakage, because it is assumed to stay in savings and not return into the system as a form of investment, as seen in the case of the closed model system to be discussed shortly. Open models thus allow for greater external environment action and roles within the modeling of the macroeconomic structure that is an individual economy.

Secondly, there is a closed system within macroeconomics which examines a much longer time perspective from a monetarist perspective. It is a "Structure whereby boundaries that should not be exceeded are clearly defined" (Morgan, 2012). Based on these clear limitations of the system, they are much easier to predict and forecast in comparison to open ended systems. These systems try to limit leakages and classify elements seen as leakages in open models much differently. 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.