1. Circular Flow Chart of a Pure Market Economy ©2012, TESCCC

2. 2 Sector Circular Flow Model Our two sectors are : 1. Households 2. Business Firms ©2012, TESCCC

3. Product Market Resource Market Products = Goods & Services $$$ Consumer Expenditures $$$$ $$$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship HouseholdsBusinesses ©2012, TESCCC

4. 3 HouseholdsBusinesses Two Sectors

5. 4 Households Households own the resources: land, labor and capital & are the entrepreneurs. They sell the resources to the businesses ©2012, TESCCC

6. Resource Market Resources = Land, Labor, Capital, Entrepreneurship HouseholdsBusinesses ©2012, TESCCC

7. Business Firms Businesses pay households for the resources. This is called national income. ©2012, TESCCC

8. 7 Resource Market $$ Nat’l Income = Rent, Wages, Interest, Profit $$ Resources = Land, Labor, Capital, Entrepreneurship HouseholdsBusinesses

9. 8 Resource Market exchange of resources for income takes place in the resource market. Households are the sellers and business firms are the buyers. ©2012, TESCCC

10. Business firms Business firms turn the resources into products (either goods or services.) They then sell the products to the households. ©2012, TESCCC

11. Product Market Products =Goods & Services HouseholdsBusinesses ©2012, TESCCC

12. Households Households use the income they earned from selling resources to purchase these products. This is called consumer expenditures. ©2012, TESCCC

13. Product Market Products =Goods & Services $$$ Consumer Expenditures $$ HouseholdsBusinesses ©2012, TESCCC

14. Product Market This exchange of products for consumer expenditures takes place in the product market. The business firm is the seller and households are the buyers. ©2012, TESCCC

15. Product Market Resource Market Products=Goods & Services $$ Consumer Expenditures $$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship HouseholdsBusinesses ©2012, TESCCC

16. Real Flow This is the flow of resources & products from household to business firms ©2012, TESCCC

17. Product Market Resource Market Products =Goods & Services Resources = Land, Labor, Capital, Entrepreneurship HouseholdsBusinesses ©2012, TESCCC

18. Money Flow This is the money that is exchanged from households to businesses, back to households ©2012, TESCCC

19. Product Market Resource Market $$ Consumer Expenditures $$ Nat’l Income = Rent, Wages, Interest, Profit $$ HouseholdsBusinesses ©2012, TESCCC

20. Product Market Resource Market Products =Goods & Services $$ Consumer Expenditures $$ $$ $$$ Nat’l Income = Rent, Wages, Interest, Profit Resources = Land, Labor, Capital, Entrepreneurship HouseholdsBusinesses ©2012, TESCCC

21. Resource Market Buyers: Business Firms Sellers: Households Exchange: Factors of production (land, labor, capital and entrepreneurship) for National income (rent, wages, interest, profit) ©2012, TESCCC

22. Product Market Buyers: Households Sellers: Business Firms Exchange: Goods & services for Consumer Expenditures part of GDP ©2012, TESCCC

23. 22 How do government actions affect the CFM and how is the CFM affected by the rest of the world? http://tutor2u.net/economics/content/topics/macroeconomy/circular_flow.htm ©2012, TESCCC