1. Circular Flow Model
Model that shows how goods and services, resources and dollar payments flow between the sectors of the economy

2. Circular Flow Model Economic Sectors Markets Households Firms
Factor Market
Market for the factors of production such as land, labor, capital and entrepreneurship
Goods and Services Market

3. Goods & Services Market
Circular Flow Model
Households
Land, Labor, Capital
& Entrepreneurship
Goods & Services
$$ - Income
$$ - Spending
Factor Market
Goods & Services Market
$$ - Costs
$$ - Revenues
Firms
Land, Labor, Capital
& Entrepreneurship
Goods & Services
It is usually easier to track the money flows – but never forget
they represent goods & services or the factors of production.

4. Goods & Services Market
Circular Flow Model
Note: Total income must equal
total production.
How large was the
US economy in 2010?
The “more” the flows are,
the “healthier” an economy is.
Households
$14.8 Trillion
total income
in 2010
Factor Market
Goods & Services Market
GDP = 14.8 Trillion
Firms
$14.8 Trillion
produced in 2010
A country’s standard of living depends on it’s ability to produce goods and services

5. Goods & Services Market
Extended Circular Flow Model
(Open Economy)
Sprivate
Households
Government T Y C G
Spublic
Factor Market
Goods & Services Market
Loanable Funds
Market I X
International
Borrowing & Lending
GDP Y M
Firms
Rest of the World
Iplanned