First, the productive sector
employs resources (such as
labour) and uses them to
create goods and services
(output).
the Firm
Households consume these
goods and services and
provide Firms with the
resources (such as labour)
that they require.
Households
The activities of Households
and Firms are linked.
Households provide
resources to Firms and earn
income (such as salaries and
wages) in exchange.
Firms produce goods and
services which they sell to
Households.
HouseholdsFirms
Households provide
resources to Firms and earn
income (such as salaries and
wages) in exchange.
Firms produce goods and
services which they sell to
Households.
Resources and goods and
services flow one way
These are called Real Flows
because they are physical
items
Money Flows go in the other
direction
Households
Firms
This is called the Circular Flow Model. It is made up of Real Flows and Money
Flows.
Households
Firms
This is
is called
an economic
model
thatModel.It
attempts
explain
theReal
realFlows
world. and
It simplifies
This
the Circular
Flow
is to
made
up of
Money all
that goes on in a real economy and just focuses on what is considered important.
Flows.
Income
Households
Resources
Firms
Goods and Services
Consumer Spending
Task
Expanding the Model
Households and Firms are not the only sectors in the economy. Before
expanding the model, we will simplify it by only using money flows from now on.
Income
Households
Resources
Goods and Services
Consumer Spending
Firms
So,
are two
new money
savings
and companies
investment.
The there
Financial
Sector
includesflows,
banks,
insurance
and other financial
institutions.Households save any income not spent with this sector
Firms go to banks to borrow funds for expansion: new factories, new machines
or research and development. This is called investment.
Income
Households
Firms
Consumer Spending
Finance
Sector
Task
Another sector to add is the Overseas Sector. Firms sell their products to
foreign buyers, earning export receipts.
A real flow of exports is matched by a money flow, export receipts.
Income
Households
Firms
Consumer Spending
Finance
Sector
Firms also import goods and services to use or sell.
The real flow of imports is matched by the money flow, import payments.
Income
Households
Firms
Consumer Spending
Finance
Sector
Our new model, showing money flows only, now looks like this.
Income
Households
Firms
Consumer Spending
Finance
Sector
Our new model, showing money flows only, now looks like this.
Income
Households
Firms
Task
Consumer Spending
Finance
Sector
End of slide show, click to exit
Income
Resources
Households
In which flow or sector would
you classify the following?
Firms
Goods and Services
A yacht
Goods/Services Consumer Spending
The buyer of a yacht
Households
Money spent on a yacht
Consumer Spending
Timber for the decking
Resources
A yacht manufacturer
Firms
A boat builder
Resources
Wages paid to a boat builder
Income
Payment for timber
Income
Profits from the sale of yachts Income
Back
Income
Savings can be defined as
income not spent
Households
Firms
Investment can be defined as
the creation of capital goods
Using these definitions,
classify the following into one
of the money flows:
Consumer Spending
Lee deposits money in the bank
Savings
Lee buys a van
Consumer Spending
LBJ Ltd buys a van
Investment
Lee buys shares in LBJ
Savings
Finance
LBJ uses a share float to expand their factory Investment
Lee receives his salary
Income
Lee gets a dividend on his shares Income
LBJ researches a new product
Investment
Back
Income
Households
In which money flow or
sector would you classify
the following?
Firms
Consumer Spending
Finance
Sector
Martin Family
Household
LV Martin and Sons
Firm
Leo Martin goes to work
Leo Martin buys a new fridge
Income
Consumption
F&P builds a new assembly line
Investment
F&P dish drawers are sold in Namibia
Leo’s new fridge was produced in Australia
Export Receipts
Import Payment
Copy this chart, then label the flows and sectors
using the list below:
•
•
•
•
•
•
•
•
•
JH Whittaker and Sons Ltd
Payment for imported cocoa beans
Whittakers purchase a new grinder
Chocoholics
Westpac Bank
Income from exported peanut slabs
Ghana
Sante Bar purchases
Factory workers wages