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2.4 Circular Flow Model & Functions of Money

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Greg Caskey

on 25 June 2018

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Transcript of 2.4 Circular Flow Model & Functions of Money

Unit 2: Free Enterprise in the USA

2.4 Circular Flow Model
Models simplify our complex world and help us understand it more fully.
Used often in economics to describe a sequence of events.

Circular Flow Model
Represents economic activity that happens and we can see everyday
Shows in simple form how individuals (households) and businesses exchange money, resources, and products in markets.
Markets For
Goods and Services
Production of G/S
Resource Owners
Markets for Resources
Goods and Services
Goods and Services
Labor and Other Resources
Labor and Other Resources
Household Spending
Business Income
Household Income
Outside Part of Model=
Inside Part of Model=
Money and its Purposes
Money and its Purposes
Money- Anything accepted as payment for G/S
why is money so important to voluntary exchange?
why not just be paid in hamburgers?
1. Medium of Exchange
--> It is like a coupon that says "I am owed a specific portion of the G/S in this economy"
2. Store of Value
--> You can hold on to it for future use.
3. Measure of Value
--> Indicates the value of products/resources... in a barter system, a product has a TON of prices
Money Functions
The following statements either describe money as a MEDIUM OF EXCHANGE, A STORE OF VALUE, OR A MEASURE OF VALUE
1. The price of a DVD player has been reduced to $9.99 2. Your bank saving account statement shows that you have $156.00 in the account 3. You pay $3.99 for a tuna sandwich 4. You have $6.75 in your sock drawer
5. The house next door is listed for sale at $177,500
6. You pay $6.50 to see a movie.
Money is great, why not print a ton of it?
Where did money come from?
Why not just be paid in cheeseburgers?
Get out your Circular Flow chart to answer these questions
How does $ HH spend become income for another HH?
How does $ that business spends on wages become income for another business?
How does HH selling their labor result in G/S for their neighbor?
What two roles do Households play in the Circular Flow Model?
What two roles to Businesses play in the Circular Flow Model?
What do the two flowing lines represent?
2.4 Circular Flow Model & Functions of Money
Leakages (withdrawals) from the circular flow
• Withdrawals refer to increases in savings, taxes or imports

Not all income will flow from households to businesses directly. The circular flow shows that some part of household income will be:
• 1.Put aside for future spending, i.e. savings (S) in banks accounts and other types of deposit
• 2.Paid to the government in taxation (T) e.g. income tax and national insurance
• 3.Spent on foreign-made goods and services, i.e. imports (M) which flow into the economy
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