Advanced Placement Macroeconomics studying national and global economic systems.
The circular flow model is a visual way to see how money, goods, and services move within an economy. It shows the interaction between two main groups: households (us!) and businesses.
Money flows from households to businesses when people buy products. Businesses pay households wages, rent, or profits for their resources. This cycle keeps economies moving!
The model can be expanded to include the government (through taxes and spending) and the rest of the world (through imports and exports), showing a more complete picture of economic activity.
Imagine arrows going in a loop: money and resources constantly cycle, keeping the economy alive.
This model helps us see how everyone is connected. If one part slows down (like people spend less), the whole system can feel the effects.
When you buy a pizza, your money goes to the restaurant (business), which pays its workers (households) and buys more ingredients.
A government collects taxes, then pays teachers, who spend their salaries on goods and services.
The circular flow model illustrates the movement of money, goods, and services in an economy between households, businesses, government, and the rest of the world.