2. 2.4 CIRCULAR FLOWS Circular flow model
A model of the economy that shows:
The circular flow of expenditures and incomes that
result from decision makers’ choices and the way those
choices interact in markets to determine what, how, and
for whom goods and services are produced.

3. Households and Firms 2.4 CIRCULAR FLOWS Households
Individuals or people living together as decision-making units.
Firms
Institutions that organize production of goods and services.

4. Markets 2.4 CIRCULAR FLOWS
A market is any arrangement that brings buyers and sellers together and enables them to get information and do business with each other.
Factor (resource) markets are markets in which factors of production are bought and sold.
Goods (Product) markets are markets in which goods and services are bought and sold.

5. Real Flows and Money Flows
2.4 CIRCULAR FLOWS
Real Flows and Money Flows
In factor markets:
Households supply factors of production
Firms hire factors of production.
In goods markets:
Firms supply goods and services produced.
Households buy goods and services.

7. Real Flows and Money Flows
2.4 CIRCULAR FLOWS
Real Flows and Money Flows
These are the real flows in the economy
Money flows run in the opposite direction to the real flows.

8. Real Flows and Money Flows
2.4 CIRCULAR FLOWS
Real Flows and Money Flows
Firms pay households incomes for the services of factors of production.
Households pay firms for the goods and services they buy.
These are the money flows.
The blue flows are incomes.
The red flows are expenditures.

10. Governments 2.4 CIRCULAR FLOWS
We divide governments into two broad levels:
Federal government
State and local government
Federal Government
The federal government’s major expenditures are to provide:
Goods and services
Social security and welfare benefits
Transfers to state and local governments

11. 2.4 CIRCULAR FLOWS
The federal government finances its expenditures by collecting taxes.
The main taxes are:
Personal income taxes
Corporate (business) taxes
Social security taxes
During the early 2000s, the federal government is spending and collecting in taxes more than $2 trillion a year—about 20 cents in every dollar earned.

12. 2.4 CIRCULAR FLOWS State and Local Governments
State and local governments expenditures provide:
Goods and services
Welfare benefits
State and local governments finance these expenditures by collecting taxes.
The main taxes levied are:
Sales taxes
Property taxes
State income taxes

13. Government in the Circular Flow
2.4 CIRCULAR FLOWS
Government in the Circular Flow
Households and firms pay taxes and receive transfers.
Governments buy goods and services from firms.

15. Federal Government Expenditures
2.4 CIRCULAR FLOWS
Federal Government Expenditures
Figure 2.11(a) shows federal government expenditures.

17. Federal Government Revenue
2.4 CIRCULAR FLOWS
Federal Government Revenue
Figure 2.11(b) shows federal government revenue.

19. Federal Government Expenditures and Revenue
2.4 CIRCULAR FLOWS
Federal Government Expenditures and Revenue
National debt
The total amount that the government has borrowed to make expenditures that exceed tax revenue—to run a government budget deficit.
During the early 2000s, the federal government’s budget is in deficit and the national debt is increasing.

20. State and Local Government Expenditures and Revenue
2.4 CIRCULAR FLOWS
State and Local Government Expenditures and Revenue
The largest part of the state and local governments expenditures are on:
Education
Highways
Public welfare benefits

21. State and Local Government Expenditures
2.4 CIRCULAR FLOWS
State and Local Government Expenditures
Figure 2.12(a) shows
state and local
government expenditures.

23. State and Local Government Revenue
2.4 CIRCULAR FLOWS
State and Local Government Revenue
Figure 2.12(b)
shows state and
local government
revenue.