1. Circular Flow Model
The Circular Flow Model describes and captures how the economy interacts with one another!!!

2. We begin with the 3 spending sectors! The three spending sectors are:

3. Businesses
Gov’t
Households

5. Where you buy your finished goods and services for use
RESOURCE MARKET
Where you get your 4 factors of production to make your goods and services
PRODUCT MARKET
Where you buy your finished goods and services for use

6. Resource Market Product Market
Businesses
Gov’t
Households
Product Market

7. In return, they receive income in the from:
HOUESHOLDS provide the resource market with the four factors of production.
Land
Labor
Capital
entrepreneurship
In return, they receive income in the from:
Rent
Wages
Interest
Profit

8. Resource Market Product Market
4 factors of production
Resource Market
R, W, I, & P
Businesses
Gov’t
Households
Product Market

9. Businesses spend $$$ (costs) in the resource market to get the 4 factors of production to make goods and services.
In return, businesses receive the land, labor, capital and entrepreneurship to make goods and services.

10. Resource Market Product Market
Resources
4 factors of production
Resource Market
R, W, I, & P
Costs
Businesses
Gov’t
Households
Product Market

11. Businesses make goods and services with their resources and supply it to the product market.
In return, businesses get revenue for supplying their goods and services.

12. Resource Market Product Market
Resources
4 factors of production
Resource Market
R, W, I, & P
Costs
Businesses
Gov’t
Households
Revenue
Product Market
Goods and Services

13. Households spend money in the product market.
In return, households get the goods and services they want and need.

14. Resource Market Product Market
Resources
4 factors of production
Resource Market
R, W, I, & P
Costs
Businesses
Gov’t
Households
Consumption
Spending
Revenue
Product Market
Goods and Services
Goods and Services

15. The government spends money in the resource market to get the 4 factors of production.
The government spends money in the product market to buy goods and services.

16. Resource Market Product Market
Resources
4 factors of production
Resource Market
R, W, I, & P
Costs
Resources
Expenditures
Businesses
Gov’t
Households
Goods and Services
Expenditures
Consumption
Spending
Revenue
Product Market
Goods and Services
Goods and Services

17. The government provides goods and services to households and businesses.
Police protection
Fire fighters
National defense
Parks
Schools
In return, households and businesses pays taxes to the government!

18. Resource Market Product Market
Resources
4 factors of production
Resource Market
R, W, I, & P
Costs
Resources
Expenditures
Goods & Services
Goods & Services
Businesses
Gov’t
Households
Taxes
Taxes
Goods and Services
Expenditures
Consumption
Spending
Revenue
Product Market
Goods and Services
Goods and Services

19. 2 Additions to the Circular Flow Model
INVESTMENT
When businesses invest money in the economy, it pumps extra money into our economy
EXPORTS
When foreigners buy American goods, it pumps more money into our economy

20. Resource Market Product Market
Resources
4 factors of production
Resource Market
R, W, I, & P
Costs
Resources
Expenditures
Goods & Services
Goods & Services
Businesses
Gov’t
Households
Taxes
Taxes
Goods and Services
Expenditures
Consumption
Spending
Revenue
Product Market
Goods and Services
Goods and Services

21. 2 Leakages to the Circular Flow Model
SAVINGS
Since households don’t spend all of their money, their savings is not money flowing into the economy.
IMPORTS
When Americans buy foreign goods, it pumps money out of the U.S. economy.

22. Resource Market Product Market
Resources
4 factors of production
Resource Market
R, W, I, & P
Costs
Resources
Expenditures
Goods & Services
Goods & Services
Businesses
Gov’t
Households
Taxes
Taxes
Goods and Services
Expenditures
Consumption
Spending
Revenue
Product Market
Goods and Services
Goods and Services

23. Review Questions!!!
The factors of production are bought and sold in the ___________ market.
Goods and services are bought and sold in the ___________ market.
In the circular flow model, ____________ buy the factors of production from _______________.
In the circular flow model, ______________ buy goods and services from _________________.
Households and businesses pay ___________ to the government in exchange for goods and services.

24. Assignment: Illustrated Circular Flow Diagram
On a separate sheet of paper, draw an ILLUSTRATED Circular Flow Diagram!!!
Use the entire paper!!!
Color your Circular Flow Diagram to help you organize what’s going on!!!