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Excellence • Demonstrate a thorough understanding of the relationships between sectors of the economy. and Merit • Explain how changes in one sector of the economy impact on other sectors. and Achieved • Describe the relationships between the major sectors of the economy. Interdependence The Circular Flow Model Different Markets Income Resources Firms Households Households are consumers of goods and services and providers of resources (such as labour) Firms employ resources (such as labour) and uses them to create goods and services Goods and Services Consumer Spending Goods and services flow from Firms to Households in return for Consumer Spending (a money flow). Resources flow from Households to Firms in return for Income (a money flow). Income Resources Firms Households In which flow or sector would you classify the following? Goods and Services A snowboard Goods/Services The buyer of a snowboard Households Consumer Spending Money spent on a snowboard Consumer Spending Timber for the core Resources A snowboard manufacturer Firms A factory worker Resources Wages paid to a factory worker Income Payment for timber Income Profits from the sale of snowboards Income Income Savings can be defined as income not spent Investment can be defined as Resources Firms Households the creation of capital goods The model can be simplified by leaving out the Real Flows. Goods and Services Consumer Spending Finance Income Savings can be defined as income not spent Investment can be defined as Firms Households the creation of capital goods In which flow or sector would you classify the following? Consumer Spending Chris deposits money in the bank Savings Chris buys a snowboard Consumer Spending LBJ Ltd buys a cutting machine Investment Chris buys shares in LBJ Savings LBJ uses a share float to expand their factory Investment Chris receives his salary Income Chris gets a dividend on his shares Income LBJ researches a new snowboard design Investment Finance