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Circular Gflow Diagram

The circular flow diagram depicts the economy as two groups, households and firms, interacting in two markets: the goods/services market where firms sell to households and the labor market where households sell labor to firms. It simplifies the real economy to better understand macroeconomic concepts like GDP and the NIPAs.

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8 views

Circular Gflow Diagram

The circular flow diagram depicts the economy as two groups, households and firms, interacting in two markets: the goods/services market where firms sell to households and the labor market where households sell labor to firms. It simplifies the real economy to better understand macroeconomic concepts like GDP and the NIPAs.

Uploaded by

Away To Ponder
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Circular Flow

The circular flow diagram pictures the economy as


consisting of two groups — households and firms —
that interact in two markets: the goods and services
market in which firms sell and households buy and
the labor market in which households sell labor to
business firms or other employees. To better understand
the economy and the NIPAs, consider a simple economy
consisting solely of businesses and individuals, as
reflected in the circular flow diagram
Circular Flow Diagram: a diagram indicating that the economy
consists of households and firms interacting in a goods-and-
services market and a labor market.
• goods-and-services market (also called the product market), in
which firms sell and households buy. 
• labor market, in which households sell labor to business firms
or other employees.
• real world, there are many different markets for goods and
services and markets for many different types of labor. The
circular flow diagram simplifies these distinctions in order to
make the picture easier to grasp.
Answer the following questions that relate to the circular flow
diagram:
1.What is the circular flow diagram?
2.Explain the role of money in the circular flow diagram. Be specific about what group pays the other
in different stages and what they are paying for.
3.True/False. The two groups that interact in the diagram are the businesses and the workers.
4.True/False. Households both receive money and spend money in the circular flow diagram.
5.True/False. In the simple circular flow diagram, firms will pay all the money that they collect from
the goods and services they sell to households for their factors of production.
6.What are the four factors of production that households provide for businesses?
7.In the simple circular flow model, who purchases goods and services from whom?
8.In the simple circular flow model, who provides factors of production for whom?
9.Explain the role of households in the circular flow diagram. Be specific about the flow of money
that they receive and pay in addition to what they give and receive from firms.
10.Explain the role of businesses in the circular flow diagram. Be specific about the flow of money
that the firms receive and pay in addition to what they give and receive from households.

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