Chapter 21, Section 1 Circular Flow - DRSS 6th Grade



Name________________________________________________ Bell#______

Unit 7a: Economics

The Circular Flow of Economics

Circular Flow

Consumers, producers, and the government interact with one another in a free-enterprise economy. These three groups exchange resources, products, and money payments. The circular-flow model demonstrates how these exchanges take place. It shows in a simple fashion how the U.S. economy works.

According to the circular-flow model, households supply resources, such as labor, to the government and to businesses. Businesses then make products for sale to households and to the government. Households and the government then pay the businesses for the products. The government produces goods and services that benefit businesses and households. It produces these goods and services by using resources such as employee labor and taxes paid by employees, households, and businesses.

Employees receive money payments, called wages or income, in exchange for the labor they provide to business and to the government. Households also receive interest, in exchange for capital that they invest. Employees and their households then act as consumers, using their income to buy goods from producers and to pay taxes to the government. The money in the economy continues to move in this circular flow among businesses, government, and households.

Households

The smallest economic unit is the household or individual. Householders are consumers- they buy goods and services. They are also producers, their labor and their investments enable businesses to create goods and services. Many individuals try to save money. The money that they save or invest is used to expand the economy. Money invested in company shares and bonds allows companies to develop new products and to build or modernize their plants. Money invested in government bonds is used to build bridges and schools.

• Consumers- buy goods and services

• Producers- labor and investments enable the government and business to create goods and services

Businesses

Businesses are consumers as well as producers. As consumers, they use land, labor, natural resources and capital to tun them into goods and services. As producers, they provide households with goods and services.

• Producers- provide households with goods and services

• Consumers- use labor, natural resources and capital

Government

The government also has a role in production and consumption. Households provide some of their resources to governments as well as to business. Businesses sell their products and services to governments as well as to households. Governments provide payments, goods, and services to households and businesses and tax both to pay for them.

• Producers- provide goods and services to households

• Consumers- buy products from businesses

| |As Producers |As Consumers |

| | | |

|Households | | |

| | | |

| | | |

|Businesses | | |

| | | |

| | | |

|Government | | |

| | | |

Explain the relationships between each of the following pairs:

| | | |

|Consumers | |Businesses |

| | | |

| | | |

| | | |

| | | |

|Businesses | |Government |

| | | |

| | | |

| | | |

| | | |

|Government | |Consumers |

| | | |

| | | |

| | | |

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download