1 The Circular Flow The simple circular flow model of the economy is designed to have us understand the basic operations of the economy.

Slides:



Advertisements
Similar presentations
C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to Describe the patterns and changes in what goods.
Advertisements

The Circular Flow Model
Warm-up On a piece of paper, describe how you think individuals (consumers), businesses (producers), and the government interact with each other in todays.
1 The International Trade and Capital Flows Chapter 23.
Chapter 11 Aggregate Demand and Supply. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.11-2 Learning Objectives Explain how the aggregate.
Circular Flow and Gross Domestic Product
Measuring a Nation’s Income
1 The Circular Flow With Government Here we expand on the simple circular flow model to include the government.
1 The Circular Flow The simple circular flow model of the economy is designed to have us understand the basic operations of the economy.
1 International Issues in Economics. 2 Intro Individuals, businesses and governments in a country may interact with individuals, businesses and governments.
MEASURING GDP AND ECONOMIC GROWTH
Chapter 2 Measuring the Economy.
1 International Issues in Economics. 2 Intro Individuals, businesses and governments in a country may interact with individuals, businesses and governments.
Chapter 8 The Classical Long-Run Model Part 1 CHAPTER 1.
1 Chapter 1. 2 Check this out! Note toward the beginning of each chapter and section of the text there is a list of topics covered. Consider these and.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Describe the patterns and changes in what goods.
and the Powerful Consumer
The Circular Flow Spending Goods and services bought Revenue Goods and services sold Labor, land, and capital Income = Flow of inputs and outputs.
The Simple Circular Flow Model
Chapter 8 The Circular Flow Model © 2003 South-Western College Publishing.
Circular Flow of Income AS Economics. The circular flow (simple)
C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to Define GDP and explain why the value of production,
Objectives Analyze a circular flow model of a pure market economy.
NATIONAL INCOME ACCOUNTING GDP: What it is and what it is not!
Chapter Five: Measuring The Economy's Performance.
Measuring Domestic Output and National Income
Circular Flow in a Market Economy
Circular Flow Diagrams
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Describe what, how, and for whom goods and services.
Circular Flow in Economics
The Market System and the Circular Flow 2 C H A P T E R.
Module 10 Mar  It is a diagram of a simplified representation of the macro-economy.  National income and product accounts or national accounts.
Macroeconomics 203 The Circular Flow. Circular Flow Model It is a model of the economy that shows the circular flow of expenditures and incomes that result.
Prepared by: Jamal Husein C H A P T E R 10 © 2005 Prentice Hall Business PublishingSurvey of Economics, 2/eO’Sullivan & Sheffrin Measuring a Nation’s Production.
1 20 C H A P T E R © 2001 Prentice Hall Business PublishingEconomics: Principles and Tools, 2/eO’Sullivan & Sheffrin Measuring a Nation’s Production and.
How money and goods flow in a Market Economy. What is a Market? A market is an arrangement that allows buyers and sellers to exchange things.
Lesson One Peter Rumble Bangor Transfer Abroad Programme BUS 111 – Micro Economics.
Circular Flow Lesson 2, Activity 5 1. Give three examples of resource owners. Answers will vary, answer can be anyone who has land, labor, capital or entrepreneurship.
2.4 CIRCULAR FLOWS Circular flow model
The Circular Flow of the Economy: Copy the chart below onto your paper, then place the terms on the next slide in the appropriate place.
Circular Flow of Income
ECONOMIC PRINCIPLES CH. 18&19. GOODS AND SERVICES Goods- production output in the form of material items such as books, movies, or automobiles Services-
Understanding the circular flow of income. HOUSEHOLDS RESOURCE OWNERS Business firms Money payments Income payments Wages, Rent, Interest, Profits Consumer.
The Circular Flow Model describes and shows how the economy interacts.
Economic Activity and Productivity
Chapter 17 Sec 2. Bell Ringer What do you do to get your pizza? What happens with the money you give the pizza shop? Name something the pizza shop owners.
Click to add text The Circular Flow of Income By David Anthony Siddall.
© 2011 Pearson Education GDP: A Measure of Total Production and Income 5 When you have completed your study of this chapter, you will be able to 1 Define.
Circular Flow Model Economists use the circular flow diagram to illustrate the basic mechanics of an economy and to illustrate the basic function of markets.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Describe what, how, and for whom goods and services.
Week 8 – Economics Theory National Income Accounting.
SESSION 5: Circular Flow Talking Points 1. In the circular flow model (CFM) of an economy, consumers trade resources for money in resource markets. They.
Circular Flow Diagrams Economists use the circular flow diagram to show the high degree of economic interdependence in our economy. Money flows in one.
Circular Flow Chart of a Pure Market Economy ©2012, TESCCC.
Economic Activity 8.03 Explain the circular flow of economic activities and how interactions determine the prices of goods and services. Part-time workers.
National Income Accounting Lecture2. What is National Income? National income is defined as the total value of all goods and services produced within.
Circular Flow Basics.  Resource/ Factor markets: productive resources ( 4 factors of production) are being bought and sold.
Circular Flow Diagram Macroeconomics. Our First Model: The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows.
Circular Flow Diagrams
The Circular Flow of Income
Circular Flow Model Model that shows how goods and services, resources and dollar payments flow between the sectors of the economy.
Circular flow SSEMI1.
Circular Flow.
Lesson One Introduction, Markets and Demand
Unit 1: Basic Economic Concepts
The Circular Flow of Economic Activity
Unit 1: Basic Economic Concepts
Circular Flow Gemma Kotula Christopher Newport University
Economic Activity and Productivity
Unit 1: Basic Economic Concepts
Presentation transcript:

1 The Circular Flow The simple circular flow model of the economy is designed to have us understand the basic operations of the economy

Households Businesses Markets for factors of production (resources) Markets for good and services

3 The simple circular flow In the simple circular flow model we have two players of the economic game: Households and Businesses. Households are: sellers of all inputs, or factors of production (the resources land, labor, capital and entrepreneurial ability), and buyers of all output of good and services. Businesses are: Buyers of all inputs and sellers of all output. On the next slide I jump into the circular flow in a somewhat arbitrary place because the system is operating in all places, but we have to start our discussion somewhere.

4 Starting at the box with households, let’s follow flows 1 through 4 in a counterclockwise fashion. Flow 1 – Households sell their land, labor, capital, and entrepreneurial ability in the market for resources. Flow 2 – Businesses buy these factors of production and use them to make goods and services. Flow 3 – Businesses sell the goods and services made. Flow 4 - Households buy the goods and services. So, when we start at the households and go counterclockwise from 1 to 4 we will follow the flows of what are called “real” things – the resources and the goods and services made. These are what are really important in the economy because these are the items used to create our standard of living.

5 Roundabout production – the making of capital goods. The simple circular flow here is a simplification of the economy. While it is true that people own resources, much of the capital accumulation is done at the corporate level. Here is a simple story to make a point. Think back to primative man. How did they catch fish? I am speculating that primative man first crouched by the water and tried to catch fish with bare hands. Pretty hard job. Later, primative man figured that if nets or rods were first made, then later more fish could be caught than if just caught by hand. Making a net is an investment in a capital good and is a roundabout method of production. Today, firms undertake a great deal of this investment because it enhances productivity.

6 Next we look at flows 5 through 8 and these are financial flows and we see a connection between spending, revenues, and income. Flow 5 – The households payment after selling resources in the factor markets is called income. Flow 6 – When the households buy stuff they pay for it and the term used in the national economy sense to represent this buying is spending or consumption expenditure. The households buy from businesses in the markets for output of good and services. Flow 7 – When the businesses sell goods and services to household the businesses collect revenue. (So, if we ignore government for now, expenditure = revenue).

7 Flow 8 – When businesses take in revenue from sales then they use the money to pay for the resources they have purchased in the markets for factors of production. Here we talk about costs of business. So the flows 5 through 8 are the financial flows that correspond to our “real” flows. The simple circular flow model is a simple model of the day to day operations of the economy. Much of the rest of the course will be filling out more realistic parts of the story.

8 Flows 1 through 4 are flows of inputs (resources) and output (goods and services). Flows 5 through 8 are flows of money. The flow of money is one way we account for the flow of resources and goods and services. Analogy – A grocery store We look at the revenue of a grocery store to get a feel for the output amount – but we know the output is made up of items like milk, cheese, steak, etc… We look at expenses to get a feel for amount of inputs used – but we know the inputs are hours of labor, watts of electricity used, and so on.

9 The last idea I would have you think about here is that while resources are turned into output 1) The output, or production, has a dollar value, 2) The resources used get paid income, and 3) The dollar value of production = income of resources. In other words, someone must earn an income when production occurs. The two values are equal in dollar amount.

10 Final thought Our economy is large and complex. Each individual business has a pretty decent grip on what resources are being used and can probably make a list of what those resources are on a sheet of paper – you know, labor, cash registers, and on and on. Each individual household knows what goods and services are being bought and can probably make a list of those items on a sheet of paper – you know, cookies, milk, and on and on. In our large complex economy it would be difficult to get these lists from businesses and households. But we have come up with ways to get at the money flows. Often our focus will be on money flows when we really want to talk about the lists.