Circular Flow Money STANDARD a b SSEMI 1

Circular Flow & Money

STANDARD � a) b) SSEMI 1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money. Explain the role of money and how it facilitates exchange.

CIRCULAR FLOW DIAGRAM � Government needs to be added to our diagram. � Goods/services provided by government. � Government gets money from taxes from households/consumers and businesses/firms.

ROLE OF MONEY

QUIZ TIME!

WHAT’S BARTERING? � Direct exchange of goods and services between people without use of money.

HOW DOES MONEY FACILITATE TRADING? 1. Money is portable (easy to carry). � Gold 2. is heavy. Would it be easy to carry salt? Money is divisible (easy to divide). � $10 is worth ten $1 bills. If something costs $7 we don’t split a $10 bill or cut it up to come up with the amount needed. 3. 4. Money is durable – long lasting. They don’t tear easily; ink doesn’t run; can even wash & dry it! Money is generally accepted. A dollar bill can buy things in Atlanta, St. Louis or Los Angeles.

STUDY HINT: � Characteristics �P of money: – PORTABLE � A – generally ACCEPTED � D – DURABLE (long lasting) � D – DIVISIBLE (easily divided)

WHAT’S THE ROLE OF MONEY? 1. It is a medium of exchange (means of trade) � Valuable because it is accepted in buying/selling goods & services. � Money makes trading easier than it would be with barter. 2. Money is a store of value. � Money is a way of storing wealth. You work today, you get paid in money and wait to spend it in the future.

WHAT’S THE ROLE OF MONEY? 3. It is a measure of value. � Money can be used to state how much things are worth. Value of goods and services can be expressed in money prices, allowing for easy comparisons.

STUDY HINT: � Role � ME � MV � SV of Money:

SUMMARY � Money makes it easier and more efficient for people to transfer ownership of goods and services. � Money offers an incentive for many people because it represents potential ownership of things of value. � Prices when expressed in terms of money help people easily understand the value of things.