• Describe the relationships between the major sectors of the economy.

• Demonstrate a thorough understanding of the relationships between sectors of the economy.

• Explain how changes in one sector of the economy impact on other sectors.

Achieved

Excellence

Merit

and

and

Interdependence

The Circular Flow Model

Different Markets

Households are consumers of goods and services and providers of resources (such as labour)

Firms employ resources (such as labour) and uses them to create goods and services

Households Firms

Income

Resources

Goods and Services

Consumer Spending

Goods and services flow from Firms to Households in return for Consumer Spending (a money flow).

Resources flow from Households to Firms in return for Income (a money flow).

In which flow or sector would you classify the following?

Money spent on a snowboard

Timber for the core

A snowboard manufacturer

Payment for timber

Profits from the sale of snowboards

A factory worker

Wages paid to a factory worker

Consumer Spending

Resources

Firms

Resources

Income

Income

Income

The buyer of a snowboard Households

A snowboard Goods/Services

Households Firms

Income

Resources

Goods and Services

Consumer Spending

Savings

Investment

Finance

The model can be simplified by leaving out the Real Flows.

Households Firms

Income

Resources

Goods and Services

Consumer Spending

Savings can be defined asincome not spent

Investment can be defined as

the creation of capital goods

Savings

Investment

Finance

In which flow or sector would you classify the following?

Chris buys a snowboard

LBJ Ltd buys a cutting machine

Chris buys shares in LBJ

Chris gets a dividend on his shares

LBJ researches a new snowboard design

LBJ uses a share float to expand their factory

Chris receives his salary

Consumer Spending

Investment

Savings

Investment

Income

Income

Investment

Chris deposits money in the bank Savings

Households Firms

Income

Consumer Spending

Savings can be defined asincome not spent

Investment can be defined as

the creation of capital goods