Chapter 18, Lesson 2

1. Chapter 18, Lesson 2 Economic Flow and Economic Growth

2. The Circular Flow Model • 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 • 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 • 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. The Consumer Sector (Households) • 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(Firms) • 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 Circular Flow • 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. The Government Sector • 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 • 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. Promoting Economic Growth • 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. Additional Productive Resources • 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. Increasing Productivity • 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 • 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 • 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 • 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!