Circular Flow Model The Circular Flow Model describes

Circular Flow Model • The Circular Flow Model describes and captures how the economy interacts with one another!!!

We begin with the 3 spending sectors! The three spending sectors are:

Businesses Gov’t Households

RESOURCE MARKET PRODUCT MARKET Where you get your 4 factors of production to make your goods and services Where you buy your finished goods and services for use

Resource Market Businesses Gov’t Product Market Households

• HOUESHOLDS provide the resource market with the four factors of production. • • • Land Labor Capital entrepreneurship In return, they receive income in the from: • • Rent Wages Interest Profit

Resource Market Businesses Gov’t Product Market 4 factors of production R, W, I, & P Households

• Businesses spend $$$ (costs) in the resource market to get the 4 factors of production to make goods and services. • In return, businesses receive the land, labor, capital and entrepreneurship to make goods and services.

Resources Resource Market Costs Businesses Gov’t Product Market 4 factors of production R, W, I, & P Households

• Businesses make goods and services with their resources and supply it to the product market. • In return, businesses get revenue for supplying their goods and services.

Resources Resource Market Costs Businesses Gov’t Revenue Goods and Services Product Market 4 factors of production R, W, I, & P Households

• Households spend money in the product market. • In return, households get the goods and services they want and need.

Resources Resource Market Costs Businesses Gov’t 4 factors of production R, W, I, & P Households Consumption Revenue Goods and Services Product Market Spending Goods and Services

• The government spends money in the resource market to get the 4 factors of production. • The government spends money in the product market to buy goods and services.

Resources Resource Market 4 factors of production R, W, I, & P Costs Resources Expenditures Businesses Gov’t Households Goods and Services Expenditures Consumption Revenue Goods and Services Product Market Spending Goods and Services

• The government provides goods and services to households and businesses. • Police protection • Fire fighters • National defense • Parks • Schools • In return, households and businesses pays taxes to the government!

Resources Resource Market 4 factors of production R, W, I, & P Costs Resources Expenditures Goods & Services Businesses Gov’t Taxes Households Goods and Services Expenditures Consumption Revenue Goods and Services Product Market Spending Goods and Services

2 Additions to the Circular Flow Model • INVESTMENT • EXPORTS • When businesses invest money in the economy, it pumps extra money into our economy • When foreigners buy American goods, it pumps more money into our economy

Resources Resource Market 4 factors of production R, W, I, & P Costs Resources Expenditures Goods & Services Businesses Gov’t Taxes Households Goods and Services Expenditures Consumption Revenue Goods and Services Product Market Spending Goods and Services

2 Leakages to the Circular Flow Model • SAVINGS • IMPORTS • Since households don’t spend all of their money, their savings is not money flowing into the economy. • When Americans buy foreign goods, it pumps money out of the U. S. economy.

Resources Resource Market 4 factors of production R, W, I, & P Costs Resources Expenditures Goods & Services Businesses Gov’t Taxes Households Goods and Services Expenditures Consumption Revenue Goods and Services Product Market Spending Goods and Services

Review Questions!!! 1. 2. 3. 4. 5. The factors of production are bought and sold in the ______ market. Goods and services are bought and sold in the ______ market. In the circular flow model, ______ buy the factors of production from ________. In the circular flow model, _______ buy goods and services from _________. Households and businesses pay

Assignment: Illustrated Circular Flow Diagram • On a separate sheet of paper, draw an ILLUSTRATED Circular Flow Diagram!!! • Use the entire paper!!! Color your Circular Flow Diagram to help you organize what’s going on!!! •