Step 3: Circular Flow of Income

CIRCULAR FLOW OF INCOME

Key Terminology/Definitions

Circular Flow of Income -> economic model showing link between consumers (households) and producers (firms)

Interdependent -> the inability of one thing to exist or occur without something else

Learning

Consumers and producers are interdependent on each other, this means they need each other to exist. We can show the interdependence of producers and consumers in an economic model called the ‘Circular flow of income’. 

The Sectors and Flows

• The circular flow model consists of two sectors – consumers/households and producers/firms  
• These sectors are connected by 4 main economic flows: 
• resources (land, labour, capital, enterprise);
• goods and services;
• consumer spending; and,
• income.

Real vs. Money Flows

Income and consumer spending are referred to as money flows as the involve the exchange of money.

Goods and services and resources are referred to as real flows as the involve the exchange of physical goods, products or items.

Activity

Watch the following video on the circular flow of income.

Explanation - how the model works

Consumers provide producers with the resources (land, labour, capital, enterprise) to make goods and services. Producers provide consumers with an income to pay for the use of these resources. In turn, the producers use these resources to make goods and services. Consumers purchase and pay for these goods and services using the income provided to them from producers. This spending is referred to as consumer spending. This model represents how money circulates around the economy in a circular motion.

Application/Consolidation

Just as we have done in previous lesson, use CANVA as your infographic creation tool to create your own version of the Circular Flow of Income model (similar to the one shown at the top of this page). 

It should be clearly labelled, use symbols and colour and be creative.

Your model should include:

• A title
• The two main sectors
• The four main economic flows
• Which flows are 'real flows' and which are 'money flows'
• A definition and explanation of the term interdependence which specifically refers to the model.

Click here to link to Canva

Once you are done, email me a copy. 

Post it!

In the comments below, explain the relationship between consumers and producers. Try to incorporate the economic terms we have learnt so far.