A Cash Model of Our Economy

The above picture shows how money moves about the economy. (The government is missing from the picture because of how complicated it would be draw it. Among other things the government takes taxes from consumers, corporations, and investors; gives the money back to consumers in the form of entitlements and wages and gives the money back to corporations through government spending; and also borrows money from investors.)

The blue arrows indicate spending that is included in GDP. This is money that is given to a corporation to create something. The red arrow for imports is subtracted from GDP, because GDP only counts things made in this country not others. The green arrows indicate transactions that are not directly counted in GDP.

Although some people are both consumers and investors, investors tend to invest significantly more than they consume and consumers tend to consume significantly more than they invest. The model is not completely accurate, but should be good enough to teach us some things.

Finally, please note that Foreign Entities also act as investors and make loans to consumers, corporations, and our government. I left it out of the drawing to make the drawing less complicated, but this will become important later.