CHAPTER 18, LESSON 2Economic Flow and Economic

Growth

The Circular Flow Model A model is a graph or diagram

used to explain something. The circular flow model shows

how resources, good and services, and money flow between businesses and customers.

The model has a circular shape because the flows it shows have no beginning or end.

For example, you might have a job in a bookstore.

You use the income you earn to purchase a book.

The bookstore uses that money to pay your wages, and so on.

The circular flow model has 4 main parts.

The Factor Market

The factor market is where factors of production are bought and sold.

When people go to work, they sell their labor in the factor market.

Capital resources like machines and tools are also bought and sold in the factor market, as are natural resources like oil or timber.

In other words, it’s what businesses need in order to make what they make!

The Product Market

The product market is where goods and services are offered for sale.

We are not just talking about 1 Walmart or 1 Publix or 1 Ebay, though.

It’s all places where things are sold combined!

Think of it as one big store where all products and services are sold.

All exchanges of goods and services take place in the product market.

The Consumer Sector (Households)

Consumers take part in both the factor and the product markets.

When consumers go to work, they sell their labor in the factor market.

When they get paid, they take that money to the product market, where they buy goods and services.

So, even if you work for Apple, but you spend money at the grocery store, both of those places are part of the factor and product markets.

You earn your money from these markets, and then give it right back to them!

The Business Sector(Firms)

The business sector represents all the companies that produce goods and services.

This sector is also active in both markets.

Businesses sell goods and services in the product market.

They use the money they receive from these sales to buy land, labor, and capital in the factor market.

For instance, if you own a restaurant, you may sell prepared food, but you still have to buy the raw food!

The Circular Flow The key feature of the model is

to show that money flows in one direction while the products and resources flow in the opposite direction.

Think of it like a vending machine.

You put your money in going one direction, and the soda comes at you from the other direction!

It also shows that markets link the consumer and business sectors.

Even though you’ll probably never see where your chewing gum is made, you’re still connected to it!

The Government Sector A more complicated version of the

model includes a couple of more sectors.

One of these is the government sector which is made up of units of federal, state, and local governments.

They all go to the product market to buy goods and services, just as people in the consumer sector do.

For instance, members of the Air Force fly jets; they don’t make them. They have to be bought.

Sometimes the government also sells goods and services to earn income.

For example, state universities are government run, but you can’t go there for free!

The Foreign Sector

The foreign sector is made up of all the people and businesses in other countries.

Businesses in other countries buy raw materials in U.S. factor markets.

For instance, oranges grown in Florida are exported all around the world.

Other countries also sell their goods and services to consumers in U.S. product markets.

Do your parents drive a Toyota, Honda, Kia, Mazda, BMW, Volkswagon, etc?

Promoting Economic Growth

The United States has experienced a clear upward trend in GDP over the past 50 years, reflecting our economic growth.

Economic growth is the increase in a country’s total output of goods and services over time.

Whenever GDP goes up from one year to the next, it means the economy has grown.

When this happens, the nation’s wealth increases as does the standard of living.

Additional Productive Resources

One thing that is needed for economic growth to occur is additional productive resources.

Certain resources are in limited supply such as land, oil, and freshwater.

Others can be preserved and replenished such as trees and other crops.

We have to focus on using our resources wisely, or we will deplete them.

Increasing Productivity Another factor necessary for

economic growth is increased productivity.

Productivity is a measure of how efficiently resources are used to create products.

Productivity goes up when more products are made with the same amount of factors of production in the same amount of time.

Suppose a factory that has made 1,000 computers each week begins to make 1,100 a week with the same number of workers.

Productivity has increased.

Specialization

Specialization occurs when people, businesses, regions, or countries concentrate on goods or services that they can produce more efficiently than anyone else.

For example, a region that has a mild climate and fertile land will specialize in farming.

A person who has good mechanical skills might specialize in car repair.

Both people and businesses are more productive when what they’re doing isn’t a struggle for them!

Division of Labor

Division of labor means breaking down a job into separate, smaller tasks that are done by different workers.

So, if one person spreads the peanut butter, another spreads the jelly, and the third slaps them together, we can get these PBJ’s made a lot faster!

Human Capital

Human capital refers to the knowledge, skills, and experience that workers can draw on to create products.

As workers gain more of these, the quality of their work improves and they become more productive.

Remember, it’s humans who invent the new technology and come up with new methods for businesses to function better!