the Firm

First, the productive sector employs resources (such as labour) and uses them to create goods and services (output).

Households

Households consume these goods and services and provide Firms with the resources (such as labour) that they require.

Households provide resources to Firms and earn income (such as salaries and wages) in exchange.Firms produce goods and services which they sell to Households.

The activities of Households and Firms are linked.

HouseholdsFirms

Households provide resources to Firms and earn income (such as salaries and wages) in exchange.

Firms produce goods and services which they sell to Households.Resources and goods and services flow one wayThese are called Real Flows because they are physical items

Money Flows go in the other direction

Households Firms

This is called the Circular Flow Model.

Households

It is made up of Real Flows and Money Flows.

Firms

Households Firms

This is called the Circular Flow Model.It is made up of Real Flows and Money Flows.This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered important.

Income

Resources

Goods and Services

Consumer SpendingTask

Income

Resources

Goods and Services

Households and Firms are not the only sectors in the economy. Before expanding the model, we will simplify it by only using money flows from now on.

Expanding the Model

Consumer Spending

Households Firms

The Financial Sector includes banks, insurance companies and other financial institutions.Households save any income not spent with this sectorFirms go to banks to borrow funds for expansion: new factories, new machines or research and development. This is called investment.

So, there are two new money flows, savings and investment.

Savings

Investment

Income

Consumer Spending

Households Firms

FinanceSector

Task

Another sector to add is the Overseas Sector. Firms sell their products to foreign buyers, earning export receipts.A real flow of exports is matched by a money

flow, export receipts.

Exports

Export

Receipts

Savings

Investment

FinanceSector

Income

Consumer Spending

Households Firms

Export

Receipts

Firms also import goods and services to use or sell.

is matched by the money flow, import payments.

The real flow of imports

ExportsIm

ports

Import

Paymen

ts

Savings

Investment

FinanceSector

Income

Consumer Spending

Households Firms

Import

Paymen

ts

Export

ReceiptsInvestment

Savings

Consumer Spending

Income

Our new model, showing money flows only, now looks like this.

Imports

FinanceSector

Households Firms

Import

Paymen

ts

Investment

Income

Our new model, showing money flows only, now looks like this.

Savings

Task

Consumer Spending

Export

Receipts

FinanceSector

Households Firms

End of slide show, click to exit

Households Firms

Income

Resources

Goods and Services

Consumer Spending

In which flow or sector would you classify the following?

Money spent on a yacht

Timber for the decking

A yacht manufacturer

Payment for timber

Profits from the sale of yachts

A boat builder

Wages paid to a boat builder

Consumer Spending

Resources

Firms

Resources

Income

Income

Income

The buyer of a yacht Households

A yacht Goods/Services

Back

Savings can be defined asincome not spent

Lee buys a van

LBJ Ltd buys a van

Lee buys shares in LBJ

Lee gets a dividend on his shares

LBJ researches a new product

LBJ uses a share float to expand their factory

Lee receives his salary

Consumer Spending

Investment

Savings

Investment

Income

Income

Investment

Lee deposits money in the bank Savings

Back

Savings

Investment

Finance

Income

Consumer Spending

Households Firms

Investment can be defined as

the creation of capital goodsUsing these definitions,

classify the following into one of the money flows:

Martin Family

LV Martin and Sons

Leo Martin goes to work

F&P dish drawers are sold in Namibia

F&P builds a new assembly line

Leo Martin buys a new fridge

Leo’s new fridge was produced in Australia

Household

Firm

Income

Consumption

Investment

Export Receipts

Import Payment

Import

Payments

Export

ReceiptsInvestment

Savings

Consumer Spending

Income

FinanceSector

Households Firms

In which money flow or sector would you classify the following?

savin

gs

Copy this chart, then label the flows and sectors using the list below:

• JH Whittaker and Sons Ltd• Payment for imported cocoa beans• Whittakers purchase a new grinder• Chocoholics• Westpac Bank• Income from exported peanut slabs• Ghana• Sante Bar purchases• Factory workers wages