 Circular Flow Model

MEANS OF PRODUCTION: used to produce goods & services  FACTORIES  FARMS  SHOPS  MINES  MACHINERY  OFFICE BUILDINGS

 In the United States mixed economymixed economy  Three sectors, or elements, that interact:  Households  Businesses  Government  Economists use the CFM to explain the interaction among these three sectors.  Each sector of the economy contributes to another.

Circular Flow Model Household & Firms – Factor Market 1. Where firms purchase or rent land 2. Firms hire workers & pay salaries for labor 3. Borrow money from households to purchase capital households interest or profits in return. Product Market 1. Households purchase products made by firms

Circular Flow Model Government in the Factor Market 1. Government purchases land, labor, & capital from households 2. Government collect taxes from firms. Government in the Product Market 1. Government purchases goods & services = building, telephones, computers, fax machines 2. Government provides goods & services = roads 3. Government collect taxes from households

Govt Taxes Govt Spending