As a result, the modern economy, as we know it today, has become a jumbled web of transactions between firms, individuals, the government, and foreigners.ĭespite the complexity, the basic premise of the economy has remained the same. The pace of change has not declined since the industrial revolution. The seeds of the industrial revolution first took root in the United Kingdom but quickly spread through the rest of Europe, North America, and ultimately the whole world. Economies became even more complex, and mechanization was brought in to improve crop production, mining, manufacturing, and transport. This led to a race to improve production efficiency, bringing about the Industrial Revolution in the 18th and 19th centuries. With the advent of money came the ability to create and store value from surplus production. The concept of money went through several iterations to become the paper fiat currency that we use today. Metal objects were first introduced as money because of the durability and malleability of metal. How many bags of rice was a chicken worth? A combination of these factors led to the birth of money. Another issue stemmed from the fact that it became increasingly difficult to identify the right ratio for the exchange. A standard model of exchange was necessary to pace up trade.

The markets were social setups where people in a community met and exchanged goods.Īs trade grew outside these communities and expanded across villages and even countries, economies grew in complexity. Apart from food and grains, people bartered livestock and plant products similar to how we use money today. As a result, an exchange mechanism evolved where products were simply swapped for others – known as the barter system. Any production surplus was simply swapped with others to meet needs that weren’t met by their own production. In ancient times humans were primarily engaged in subsistence farming which meant that they produced goods, mainly food and grain, primarily for their own consumption. Foreign Entities and The Foreign Sector.Role of The Financial Sector (Banks), Firms, and Households in The Circular Flow Model.

Circular flow of economy