Circular Flow

Circular Flow Model
-Circular Flow Model: represents the flow of money, goods, and services

• Composed of 2 markets:

            -Market: place where buyers and sellers come together to generate economic activities

               1. Factor Market-market where factors of production are bought and sold (also referred to as Resource Market)
                        Example: Flipping burgers at a fast food restaurant would be encompassed in the Factor Market (labor) which falls under physical capital.
               2. Product Market-market where goods and services are bought and sold (also referred to as Goods Market)
                        Example: Having a plumber fix your sink would be apart of the Product Market, because they are providing a service.

LOOK in Macroeconomics: Introduction Post for quick review/assistance!

• Involves 2 Economic Actors:

               1. Firms- business or organization that produces goods and services for sale
                      Example: Dole, Dell, Kraft, etc.
               2. Households- person or group of people who share an income

-Circular Flow Model Diagram:

• Roles Involved within the cycle:

             -Firms/businesses: Buy resources; Sell products
             -Households: Sell resources; Buy Products
             -Government: Acts as BOTH a consumer and producer in BOTH markets
             -Rest of the World (R.O.W.): Purchase U.S. Exports and provide for U.S. Imports
             -Factor Market: Firms buy; Households sell
             -Product Market: Firms sell; Households buy

• Government's Role:

            -Receives taxes from both Firms and Households
            -Distributes goods and services to both Firms and Households
            -Distributes Expenditures (payment or promise of a future payment) to both the Factor Market and the Product Market
            -Receives resources via the Factor Market
            -Receives goods and services from the Product Market

• Important Aspects:

            -Resources flow from households to businesses through the resource market, and products flow from businesses to households through the product market
                  *Flow of economic resources and finished goods is Counterclockwise
            -Households receive income from businesses (their costs) through the resource market, and businesses receive revenue from households (their expenditures) through the product market
                   *Money flow of income and consumption expenditures is Clockwise
            -Income is composed of Wages, Rents, Interest, and Payments (Willy Rest In Peace)

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