Everyone is involved in daily economic activities in the real world. They produce, trade and consume a variety of products, while forming economies of various classifications and levels as well as larger-scale economic activity among them. The real world economy is diverse and complex, but we can use a simplified approach to create the simplest economic cycle model to illustrate how wealth is generated.In this model, there are only four objects: two producers, one bank, and one market, and assuming that the producers pursue a production process that maximizes profits. Referring to the diagram above, let's look at the arrows marked with serial numbers.
- The producer borrows money from the bank.
2. The producer uses the borrowed money to purchase the means of production in the market.
3. The producer uses the purchased means of production to produce goods.
4. The producer sells their products to the market in exchange for money.
5. The producer uses a portion of the money earned to repay the principal and bank interest.
A new cycle begins again.
In reference to the above steps in the economic cycle, the following points need to be made:The producer has created wealth if surplus has been achieved after the bank loan is repaid in step 5.
The means of production purchased by the producer in step 2 are the products sold by the other producer in step 5.
After the transaction of the two producers in the figure, the wealth of everyone increased due to the social division of labor. The wealth of the entire economy increased, including banks.