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Circular Flow Model

Circular Flow Model. A tool that economists use to understand how market economies operate. Circular Flow Chart of “Economic Activity” Only applies to a MARKET ECONOMY. Two sectors ( usually on horizontal plane—East/West) households and businesses

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Circular Flow Model

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  1. Circular Flow Model A tool that economists use to understand how market economies operate.

  2. Circular Flow Chart of “Economic Activity” Only applies to a MARKET ECONOMY

  3. Two sectors (usually on horizontal plane—East/West) • households and businesses • Two markets (usually on vertical plane—North/South) • product and factor • Two Flows - money ($$) - Resources/Products or goods/services Factors of Production are owned by households

  4. Businesses Households

  5. Households Businesses Factor Market (or Resource Market)

  6. Households Businesses (SELL) F.O.P. = Land, Labor, Capital, Entrepreneurship Factor Market (or Resource Market)

  7. (PAY) = Wages (labor), Rent (land), Interest(capital), Profit (entrepreneur) (SELL) F.O.P = Labor, Land, Capital, Entrepreneurship Households Businesses Factor Market (or Resource Market)

  8. National Income = Wages, Rent, Interest, Profit F.O.P = Labor, Land, Capital, Entrepreneurship Product Market Households Businesses Factor Market (or Resource Market)

  9. National Income The total income earned in a nation from the production of goods and services.

  10. National Income = Wages, Rent, Interest, Profit F.O.P = Labor, Land, Capital, Entrepreneurship Product Market (SELL) Goods & Services Households Businesses Factor Market (or Resource Market)

  11. National Income = Wages, Rent, Interest, Profit F.O.P = Labor, Land, Capital, Entrepreneurship Product Market (PAY) – Consumer Spending Households Businesses Factor Market (or Resource Market)

  12. Product Market SELL- Goods & Services GDP -Consumer Spending Households Businesses National Income = Wages(Labor), Rent (Land), Interest, (Entrepreneur) Profit F.O.P = Labor, Land, Capital, Entrepreneurship Factor Market (or Resource Market)

  13. GDP - Gross Domestic Product The dollar value of all goods and services produced within a nation in a year.

  14. Flow of Resources/Products Product Market Product Market Goods & Services Households Businesses F.O.P = Labor, Land, Capital, Entrepreneurship Factor Market (or Resource Market)

  15. Money Flow Product Market GDP = Consumer Spending Households Businesses National Income = Wages, Rent, Interest, Profit Factor Market (or Resource Market)

  16. Product Market Goods & Services GDP = Consumer Spending Households Businesses National Income = Wages, Rent, Interest, Profit F.O.P = Labor, Land, Capital, Entrepreneurship Factor Market (or Resource Market)

  17. 1- You buy a new pair of jeans. Which market is this transaction? 2- You get a job at Wal-Mart and get paid wages to pay your bills. Which market is this? 3- Academy is hiring more workers during Christmas break. Which market will this take place? 4- I bought my sister a gift for her birthday. Which market is this? 5- I got fired from my job as a snow cone maker. Which market is this?

  18. 1- You need a smartphone to look up how to get to your friends house. What resource is the smartphone? 2- You’re making money from your brilliant new idea. What income will be earned? 3- You need wood and sand to make your product. What resource are these? 4- I work as a carhop at Sonic. What income is earned?

  19. https://www.youtube.com/watch?v=mN5HPJYJzus -Crash Course: about 5min.

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