Circular Flow & Money

 SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. a) Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money. b) Explain the role of money and how it facilitates exchange.

 Government needs to be added to our diagram.  Goods/services provided by government.  Government gets money from taxes from households/consumers and businesses/firms.

 Direct exchange of goods and services between people without use of money.

1. Money is portable (easy to carry).  Gold is heavy. Would it be easy to carry salt? 2. Money is divisible (easy to divide).  $10 is worth ten $1 bills. If something costs $7 we don’t split a $10 bill or cut it up to come up with the amount needed. 3. Money is durable – long lasting. They don’t tear easily; ink doesn’t run; can even wash & dry it! 4. Money is generally accepted. A dollar bill can buy things in Atlanta, St. Louis or Los Angeles.

 Characteristics of money:  P – PORTABLE  A – generally ACCEPTED  D – DURABLE (long lasting)  D – DIVISIBLE (easily divided)

1. It is a medium of exchange (means of trade)  Valuable because it is accepted in buying/selling goods & services.  Money makes trading easier than it would be with barter. 2. Money is a store of value.  Money is a way of storing wealth. You work today, you get paid in money and wait to spend it in the future.

3. It is a measure of value.  Money can be used to state how much things are worth. Value of goods and services can be expressed in money prices, allowing for easy comparisons.

 Role of Money:  ME  MV  SV

 Money makes it easier and more efficient for people to transfer ownership of goods and services.  Money offers an incentive for many people because it represents potential ownership of things of value.  Prices when expressed in terms of money help people easily understand the value of things.