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Circular Flow Model

Explore the Circular Flow Model, a tool used by economists to analyze market economies. Learn about sectors, markets, flows, factors of production, national income, GDP, and the flow of resources and products. Test your knowledge with practical scenarios!

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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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