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Circular Flow Model

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22 views13 pages

Circular Flow Model

Uploaded by

mughniltfh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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August 30 , 2016

• Good morning/afternoon 

• Please get out your notes and something to write


with. Duplicate the Circular Flow Matrix that
appears on the board in your notes. (If you have
different colored pens that may be helpful today).
Let’s Review
• What are the four Factors of Production?
• What are consumer goods (consumption)?
• What are government goods?
• What are exports?

Today, we are going to understand how the Factors


of Production play a role in our households,
business and government.
Circular Flow
Model
FLOWS
Circular flow model (matrix) shows:
o The circular flow of expenditures and
incomes that result from decision makers’
choices and
o The way those choices interact in markets
determines what, how, and for whom goods
and services are produced.
Households and
Businesses
Households and
Businesses
o Households are
individuals or people
living together as
decision-making units.
o Firms (businesses)
are institutions that
organize production of
goods and services.
Markets
Markets
o A market is any
arrangement that brings
buyers and sellers
together and enables
them to do business.
o Product (goods)
markets: markets in
which goods and services
are bought and sold.
o Resource (factor)
markets: markets in
which factors of
production are bought
and sold.
Real Flows and
Money Flows
In factor
• Households supply
markets:
factors of production
• Firms hire factors of
production.

In goods
markets:
• Firms supply goods and
services produced.
• Households buy goods
and services.
Real Flows and Money Flows, cont’d.

MONEY FLOWS
• Firms pay for the factors of
production and households
incomes for the services of
factors of production.
• Households pay firms for the
goods and services they buy
which creates revenue for
the businesses..
• These are the money flows.

• Green flows are


incomes.
• Red flows are
expenditures.
Government in the Flow
The federal government’s major
expenditures are to provide
1. Goods and services
2. Social Security and welfare
benefits
3. Transfers to state and local
governments
o The federal government finances its
expenditures by collecting taxes.
o The main taxes are
1. Personal income taxes
2. Corporate (business) taxes
3. Social Security taxes
o In 2008, the federal government spent $3
trillion—about 21 percent of the total
value of all the goods and services
produced in the United States in that year
(GDP or Gross Domestic Product).
o Taxes raised less than $3 trillion—the
Governments in the
Circular Flow

● Households and
firms pay taxes and
receive transfers.

●Governments both
provide and buy
goods and services.
Mr. Clifford
Circular Flows in Global
Economy
• Households and firms in the U.S. economy interact with
households and firms in other economies in two main
ways:
• They buy and sell goods and services. They borrow and
lend.
• We call these two activities:
• International trade – buying (imports), selling
(exports)
• International finance – borrowing and lending
Global Flow
• Households and firms in the U.S.
economy interact with those in
the rest of the world in goods
markets and financial markets.
• The red flow shows the
expenditure by Americans on
imports of goods and
services
• The blue flow show the
expenditure by the rest of
the world on U.S. exports
(other countries’ imports
• The green flow shows U.S.
lending to the rest of the
world.
• The orange flow shows U.S.
borrowing from the rest of
the world.

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