If the economy really is a subsystem of the biosphere, the models we use to picture it should show that. Most of them do not. This page covers the models built by people who took that problem seriously — and the older ones they were built to replace.
📚 What you need to know
Ecological economics supports degrowth, zero growth or slow growth — reducing consumption and production, especially in wealthy countries.
Its goal is sustainable balance: a country’s ecological footprint matched by its biocapacity. If the footprint is larger, the country is not sustainable.
The circular economy minimises waste and resource depletion through reuse, repair and recycling, using product stewardship and two cycles: biological and technical.
Doughnut economics (Kate Raworth) keeps activity between a social foundation and an ecological ceiling — a safe and just space for humanity.
The circular flow model is a different thing entirely from the circular economy. It comes in a two-sector (isolated) and a five-sector (open) version.
Both circular flow models leave nature out. That omission is called human-nature dualism and it has helped drive overexploitation.
The embedded economy model (Herman Daly, 1970s) puts the economy inside society inside the Earth, with solar energy and materials in, heat and waste out.
The test: footprint against biocapacity
Ecological economics is less interested in GDP, which only measures activity, and more interested in whether a country is living within its means ecologically. That comparison is simple:
Ecological footprint — how much land and sea a population’s consumption actually requires.
Biocapacity — how much that land and sea can regenerate.
Sustainability means not harming the environment faster than it can recover, and not removing resources faster than they regenerate and are replaced. If biocapacity is lower than the footprint, the country is running a deficit and is not sustainable.
Neither country’s GDP tells you any of this. That is the point ecological economists keep making about GDP.
Why change is slow: long-standing economic systems are deeply embedded and hard to shift, and ecological economists are still working on how to measure social and environmental wellbeing accurately. It is much easier to count output than to count wellbeing, and what gets counted is what gets managed.
The circular economy
Most resources today move through a linear system: finite resources are extracted, made into products, used, and thrown away at the end of their life. More production means more waste, with no way out of that relationship.
The circular economy is designed to break it. It minimises waste production and resource depletion by promoting reuse, repair and recycling, extending the lifespan of products and materials so fewer new resources are needed. Recycling is the first step towards it, not the goal.
The return arrow goes back to manufacturing, not to raw extraction. Every loop that skips the extraction step is a saved resource.
Product stewardship
The circular economy runs on product stewardship: responsibility for the sustainable management of a product sits with the manufacturer, the seller and the user. That covers design, manufacturing, use and disposal, with the aim of promoting sustainability and reducing environmental harm. Design matters most — a product that cannot be opened cannot be repaired, and that was decided years before anyone bought it.
IKEA’s furniture leasing schemes are a well-known example. Customers rent furniture for a set period and pay a periodic fee, then return it or renew the lease rather than buying outright. Because the company gets the item back, it has a direct reason to make it last, which extends the lifespan of the furniture and cuts waste.
Two cycles
Biological cycle — biodegradable products are returned to the natural environment, where they break down safely.
Technical cycle — products are recycled, reused, repaired or remanufactured within the economy.
Watch the leasing example carefully, because it shows what actually drives circularity. Under normal selling, a product breaking after two years is good for the manufacturer. Under leasing, the same breakage is a cost they pay. Nothing about the customer changed — the incentive moved. That is the mechanism, and saying so is worth more than listing the benefits.
Doughnut economics
Doughnut economics, developed by Kate Raworth, is a framework for keeping economic activity inside the ecological limits of the planet while addressing social inequality and injustice at the same time. It is drawn as a ring — a doughnut — with two boundaries.
Most economic models optimise one thing. The doughnut insists on two limits at the same time, which is what makes it harder and more honest.
The space between the rings has been described as a safe and just space for humanity. Aiming to operate inside it is a way of pursuing sustainable development that meets the needs of present and future generations together. Cities have started using it in practice: Amsterdam has adopted the doughnut model to guide policymaking, putting environmental sustainability and social equity into urban development plans.
Both models in one line each
circular economy = keep materials in use | doughnut economics = stay between the floor and the ceiling
The older models, and what they leave out
The circular flow model is a completely different thing from the circular economy, despite the name. It comes in two versions.
Two-sector (isolated) model. Only two actors: households and firms. Households provide resources — the factors of production, most notably labour — and receive income (Y) in the form of wages, rent, dividends and profit. Firms use those resources to create output (O), and households spend expenditure (E) to buy it. The system boundary is drawn tightly around those two actors.
Five-sector (open) model. Adds three more: the financial sector (firms such as banks), the government sector and the overseas sector. Each either puts money into the core exchange (injections) or takes it out (leakages). Households and firms pay taxes to the government — a leakage — while government spending back into the economy is an injection. Saving is a leakage and investment an injection; imports are a leakage and exports an injection.
Both versions picture economic activity as a closed system of resource creation and financial exchange. Neither has room for nature. The environment is not simplified in these models — it is invisible, treated as separate from economic activity entirely. That way of thinking is called human-nature dualism, and it has played a large part historically in the overexploitation and degradation of the natural environment.
The embedded economy model
Proposed by the ecological economist Herman Daly in the 1970s, the embedded economy model is the open alternative. It acknowledges that the economy, society and the environment are interconnected, showing the input of solar energy and material resources and the output of heat loss and waste into the Earth’s sinks.
Its key claim is that economic activity is embedded within and dependent upon the natural environment. The economy is contained within society, which is contained within nature. It also gives space to contributions the older models ignore, such as unpaid care work and the commons. The result is more complex, but far more complete — and it points directly at the need for sustainable resource management and social equity.
Model
What is inside the boundary
What is left out
Two-sector circular flow
Households and firms only, exchanging resources, income, output and expenditure
Government, banks, trade, and the entire natural environment
Five-sector circular flow
Households, firms, the financial sector, government and the overseas sector, with injections and leakages
Still the natural environment: no resource inputs, no waste outputs, no limits
Embedded economy
Economy inside society inside the Earth, with solar energy and materials in, heat and waste out, plus unpaid work and the commons
Little is left out, which is why it is harder to use for quick calculations
You will not be asked to draw these diagrams. You will be asked what each model includes, what it excludes, and why those choices matter. That last part is where the marks are: a model that leaves nature out will never produce a policy that protects nature, because the model has no way of noticing the damage.
Worked examples
WORKED EXAMPLE
A country has an ecological footprint of 4.8 gha per person and a biocapacity of 1.2 gha per person. Its population is 60 million. Calculate the ecological deficit and comment on sustainability. [4]
Step 1: deficit per person4.8 − 1.2 = 3.6 gha per personStep 2: total deficit3.6 × 60 000 000 = 216 000 000 ghaStep 3: express it as a ratio4.8 ÷ 1.2 = 4
The country consumes four times what its own land and sea can regenerate.
Deficit of 216 million gha: not sustainableSay why it is unsustainable: the shortfall is met by importing biocapacity or by running down natural capital.
WORKED EXAMPLE
Compare the circular economy with doughnut economics. [4]
What they share
Both are built on the principles of ecological economics and both aim to increase sustainability by tackling environmental and social challenges inside economic systems.
Circular economy: the focusmaterials → efficient use through product stewardship
Reuse, repair and recycling, extending product lifespans to cut waste and resource depletion.
Doughnut economics: the focuslimits → how much activity is possible without breaking either boundary
Staying above the social foundation and below the ecological ceiling.
One is about how materials move; the other is about where the limits areA comparison needs both similarity and difference. Do not give only one.
💡 Exam tip
Never write “circular economy” when you mean “circular flow model”. The syllabus warns about this specifically, and the two have almost nothing in common.
Learn the doughnut by its two boundaries: social foundation inside, ecological ceiling outside, safe and just space between. Shortfall below, overshoot above.
Name the two circular economy cycles — biological for biodegradable materials, technical for repair, reuse and remanufacture.
Use “product stewardship” by name and say who it covers: manufacturer, seller and user.
For footprint questions, always compare against biocapacity. A footprint on its own tells you nothing about sustainability.
Have the examples ready: IKEA leasing for the circular economy, Amsterdam for the doughnut, Herman Daly for the embedded economy model.
⚠️ Common mix-up
Confusing the circular flow model with the circular economy. The first is a diagram of money moving between households and firms; the second is a system for keeping materials in use.
Getting the doughnut inside out. The hole in the middle is the bad place — it is where basic needs go unmet.
Thinking degrowth means everyone gets poorer. The argument is about reducing consumption and production in wealthy countries specifically, while the social foundation is still met.
Saying the five-sector model includes the environment. It adds banks, government and trade. Nature is still absent from both versions.
Treating recycling as the whole circular economy. It is the first step. Reuse, repair and remanufacture retain more value and come earlier in the hierarchy.
Forgetting the social half of the doughnut. It is not an environmental model with a bit of ethics attached; the two boundaries carry equal weight.
That completes Topic 10 — Environmental Economics. Test yourself across all seven pages: explain a market failure, explain why a commons collapses, value something with no price, calculate a growth rate, judge a decoupling claim, place the economy inside the biosphere, and compare the circular economy with the doughnut. If all seven hold, this topic is finished.
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