1. Economic Flow and Economic Growth

2.  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.

3.  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!

4.  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.

5.  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!

6.  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!

7.  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!

8.  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!

9.  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?

10.  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.

11.  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.

12.  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.

13.  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!

14.  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!

15.  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!