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The Circular Flow of Economic Activity

Explore how consumers, businesses, government, and international trade interact in the economy. Learn about the roles of consumers as users, workers, and citizens, the functions of businesses and industry, the impact of government, and the benefits of international trade. Understand the flow of goods, services, and money through production, distribution, and trade.

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The Circular Flow of Economic Activity

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  1. The Circular Flow of Economic Activity

  2. Consumers • Consumers play 3 roles in the economy • Consumer -- user of goods and services. Free to choose. Can spend now for immediate wants or save for future consumption. • Worker -- producer of goods and services. Earner of income. • Citizen -- join with others to make group decisions. Influence laws, pay taxes, vote. Determine use of public goods and services.

  3. Business and Industry • Provide goods and services in return for profit. • 4 components • production • processing • distribution • services

  4. Government • Provides legal framework for economic activity. Also is a producer and consumer as well as an economic force. Can use its economic power to accomplish socially desirable goals.

  5. International Trade • Provides better, different, or cheaper goods and services and the resources we need to produce.

  6. The Circular Flow • The circular flow follows two paths through the economy -- money and goods and services. • It shows the interaction between the 4 parts of the economy -- consumers, businesses, government, and international trade.

  7. Flow of Goods and Services • Individuals provide the factors of production (land, labor, capital, management). • Businesses use the factors to produce goods and services.

  8. The Money Flow • Businesses pay for the factors of production. • Individuals buy the goods and services.

  9. By adding the government, you get two new circles. • One shows interaction between the government and consumers.

  10. The second shows the interaction between the government and businesses.

  11. Putting those together gives you the two inner circles.

  12. Next we put consumers, businesses and the government together.

  13. International Trade • The last part of the flow chart involves money and goods and services flowing into and out of the country via imports and exports. • See page 428 of your textbook.

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