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Chapter 18, Lesson 2. Economic Flow and Economic Growth. The Circular Flow Model. A model is a graph or diagram used to explain something. The circular flow model shows how resources, good and services, and money flow between businesses and customers.

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chapter 18 lesson 2

Chapter 18, Lesson 2

Economic Flow and Economic Growth

the circular flow model
The Circular Flow Model
  • A model is a graph or diagram used to explain something.
  • The circular flow model shows how resources, good and services, and money flow between businesses and customers.
  • The model has a circular shape because the flows it shows have no beginning or end.
  • For example, you might have a job in a bookstore.
  • You use the income you earn to purchase a book.
  • The bookstore uses that money to pay your wages, and so on.
  • The circular flow model has 4 main parts.
the factor market
The Factor Market
  • The factor market is where factors of production are bought and sold.
  • When people go to work, they sell their labor in the factor market.
  • Capital resources like machines and tools are also bought and sold in the factor market, as are natural resources like oil or timber.
  • In other words, it’s what businesses need in order to make what they make!
the product market
The Product Market
  • The product market is where goods and services are offered for sale.
  • We are not just talking about 1 Walmart or 1 Publix or 1 Ebay, though.
  • It’s all places where things are sold combined!
  • Think of it as one big store where all products and services are sold.
  • All exchanges of goods and services take place in the product market.
the consumer sector households
The Consumer Sector (Households)
  • Consumers take part in both the factor and the product markets.
  • When consumers go to work, they sell their labor in the factor market.
  • When they get paid, they take that money to the product market, where they buy goods and services.
  • So, even if you work for Apple, but you spend money at the grocery store, both of those places are part of the factor and product markets.
  • You earn your money from these markets, and then give it right back to them!
the business sector firms
The Business Sector(Firms)
  • The business sector represents all the companies that produce goods and services.
  • This sector is also active in both markets.
  • Businesses sell goods and services in the product market.
  • They use the money they receive from these sales to buy land, labor, and capital in the factor market.
  • For instance, if you own a restaurant, you may sell prepared food, but you still have to buy the raw food!
the circular flow
The Circular Flow
  • The key feature of the model is to show that money flows in one direction while the products and resources flow in the opposite direction.
  • Think of it like a vending machine.
  • You put your money in going one direction, and the soda comes at you from the other direction!
  • It also shows that markets link the consumer and business sectors.
  • Even though you’ll probably never see where your chewing gum is made, you’re still connected to it!
the government sector
The Government Sector
  • A more complicated version of the model includes a couple of more sectors.
  • One of these is the government sector which is made up of units of federal, state, and local governments.
  • They all go to the product market to buy goods and services, just as people in the consumer sector do.
  • For instance, members of the Air Force fly jets; they don’t make them. They have to be bought.
  • Sometimes the government also sells goods and services to earn income.
  • For example, state universities are government run, but you can’t go there for free!
the foreign sector
The Foreign Sector
  • The foreign sector is made up of all the people and businesses in other countries.
  • Businesses in other countries buy raw materials in U.S. factor markets.
  • For instance, oranges grown in Florida are exported all around the world.
  • Other countries also sell their goods and services to consumers in U.S. product markets.
  • Do your parents drive a Toyota, Honda, Kia, Mazda, BMW, Volkswagon, etc?
promoting economic growth
Promoting Economic Growth
  • The United States has experienced a clear upward trend in GDP over the past 50 years, reflecting our economic growth.
  • Economic growth is the increase in a country’s total output of goods and services over time.
  • Whenever GDP goes up from one year to the next, it means the economy has grown.
  • When this happens, the nation’s wealth increases as does the standard of living.
additional productive resources
Additional Productive Resources
  • One thing that is needed for economic growth to occur is additional productive resources.
  • Certain resources are in limited supply such as land, oil, and freshwater.
  • Others can be preserved and replenished such as trees and other crops.
  • We have to focus on using our resources wisely, or we will deplete them.
increasing productivity
Increasing Productivity
  • Another factor necessary for economic growth is increased productivity.
  • Productivity is a measure of how efficiently resources are used to create products.
  • Productivity goes up when more products are made with the same amount of factors of production in the same amount of time.
  • Suppose a factory that has made 1,000 computers each week begins to make 1,100 a week with the same number of workers.
  • Productivity has increased.
  • Specialization occurs when people, businesses, regions, or countries concentrate on goods or services that they can produce more efficiently than anyone else.
  • For example, a region that has a mild climate and fertile land will specialize in farming.
  • A person who has good mechanical skills might specialize in car repair.
  • Both people and businesses are more productive when what they’re doing isn’t a struggle for them!
division of labor
Division of Labor
  • Division of labor means breaking down a job into separate, smaller tasks that are done by different workers.
  • So, if one person spreads the peanut butter, another spreads the jelly, and the third slaps them together, we can get these PBJ’s made a lot faster!
human capital
Human Capital
  • Human capital refers to the knowledge, skills, and experience that workers can draw on to create products.
  • As workers gain more of these, the quality of their work improves and they become more productive.
  • Remember, it’s humans who invent the new technology and come up with new methods for businesses to function better!