A Circular Flow Diagram

a. Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.

• Shows the economic flow of goods and services between households, businesses, and government through the product and resource markets.

SSEMI1a Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

A Circular Flow Diagram

SSEMI1a Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

According to the standard, what’s missing from the diagram? According to the standard, what’s missing from the diagram? According to the standard, what’s missing from the diagram?

Definitions

• household – individual or group that occupy a single housing unit (residence)

• business – individual or group that work to produce a good or service

• government – provides law and order, structure, and even necessary goods and services that the market might not provide

SSEMI1a Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

(1 of 3)

• product market – goods sold for final consumption to a consumer (which could be a household, business, or the government) are sold in the product market

• resource (or factor) market – to improve production, producers buy the four factors of production (land, labor, capital, and entrepreneurship) in the resource market

SSEMI1a Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

Definitions (2 of 3)

Factoror

ResourceMarket

ProductMarket

Householdsor

IndividualsBusiness

Consumer Spending

Payment for Resources

Goods & Services

Business

Inco

me

Goods&

Services

Buy Factorsof

ProductionLand, C

apital

Labor, Entre

preneurs

Circular Flow of Economic Activity

Government

Income from Resources

Taxes & “Tax Breaks”

Spending

Spending

Fees

Fees

Taxes & “Tax Breaks”

SSEMI1a Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

So What?

• Since money flows in a circular flow between households, businesses, and government, then each depends on the other for the economy to function smoothly. This is called economic interdependence.

SSEMI1a Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

The Role of Money

b. Explain the role of money and how it facilitates exchange.

SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.

The Role of Money

• medium of exchange – a method or agreed upon standard (other than exchanging products or labor) for exchanging one thing for another. The modern medium of exchange is money.

• Money is NOT what people want. Money is used to buy what people want.

SSEMI1b Explain the role of money and how it facilitates exchange.