Download Two-Sector Circular Flow Model

Circular Flow Chart of a Pure
Market Economy
©2012, TESCCC
©2012, TESCCC
Objectives
1. Analyze a circular flow model of a pure
market economy.
2. Explain how you act as both a buyer and
a seller.
3. Explain the economic interdependence of
this model.
©2012, TESCCC
©2012, TESCCC
2 Sector Circular Flow Model
Our two sectors are :
1. Households
2. Business Firms
©2012, TESCCC
©2012, TESCCC
Product Market
Products = Goods & Services
$$$ Consumer Expenditures $$$$
Households
Businesses
$$$$
Nat’l Income = Rent, Wages, Interest, Profit
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
©2012, TESCCC
©2012, TESCCC
Two Sectors
Households
Businesses
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©2012, TESCCC
5
Households
• Households are the owners of the
resources, land, labor and capital.
Households become the entrepreneurs.
They sell these resources to the
business firms.
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Households
Businesses
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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©2012, TESCCC
Business Firms
• Business firms make money payments
back to households for the resources.
This makes up what we call national
income.
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Households
Businesses
$$ Nat’l Income = Rent, Wages, Interest, Profit $$
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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©2012, TESCCC
9
Resource Market
• This exchange of resources for income
payments takes place in what we call
the resource market. Households are
the sellers and business firms are the
buyers.
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Business firms
• Business firms take the resources and
turn them into products. A product can
be a good or a service. They then sell
the products to the households.
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Product Market
Products =Goods & Services
Households
Businesses
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©2012, TESCCC
Households
• Households use the income they
earned from selling resources to
purchase these products. This is called
consumer expenditures.
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Product Market
Products =Goods & Services
$$$ Consumer Expenditures $$
Households
Businesses
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Product Market
• This exchange of products for
consumer expenditures takes place in
the product market. The business firm is
the seller and households are the
buyers.
©2012, TESCCC
©2012, TESCCC
Product Market
Products=Goods & Services
$$ Consumer Expenditures $$
Households
Businesses
Nat’l Income = Rent, Wages, Interest, Profit
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
©2012, TESCCC
©2012, TESCCC
Real Flow
• This is the flow of resources from
household to business firms and the
flow of finished products from business
firms to households.
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©2012, TESCCC
Product Market
Products =Goods & Services
Households
Businesses
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
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Money Flow
• This is the money from business firms
to households as income. From
households to business firms it is
consumer expenditures, consumers
buying products.
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Product Market
$$ Consumer Expenditures $$
Households
Businesses
Nat’l Income = Rent, Wages, Interest, Profit
$$
Resource Market
©2012, TESCCC
©2012, TESCCC
Product Market
Products =Goods & Services
$$ Consumer Expenditures $$
Households
$$
Businesses
$$$
Nat’l Income = Rent, Wages, Interest, Profit
Resources = Land, Labor, Capital, Entrepreneurship
Resource Market
©2012, TESCCC
©2012, TESCCC
Resource Market
• Buyers: Business Firms
• Sellers: Households
• Exchange: Factors of production (land,
labor, capital and entrepreneurship)
for
National income
(rent, wages, interest, profit)
©2012, TESCCC
Product Market
• Buyers: Households
• Sellers: Business Firms
• Exchange: Goods & services
for
Consumer Expenditures
part of GDP
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How do government actions affect the CFM and how is
the CFM affected by the rest of the world?
(consumption)
©2012, TESCCC
http://tutor2u.net/economics/content/topics/macroeconomy/circular_flow.htm
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