Test 2 AP Macro - Circular Flow Diagram

Consumers

People who buy goods and services

Who are Households

Consumers

Producers

People who make goods and services

Who are Firms?

Producers

Households Roles

• Buy goods and services

• Sell factors of production

• To Government:

  • Pay taxes

  • Receive transfers from government

Firms Roles

• Sell goods and services

• Buy factors of production (like labor)

• To Government:

  • Pay taxes

  • Receive transfers from government

What is a benefit of the Circular Flow diagram?

It is a way to view the economy as a whole

Markets

Place where buyer and sellers interact

What two markets do households and firms interact with?

Market for goods and services & Market for factors of production

Market for goods and services

Place where consumers buy things (ex: Tom thumb, Walmart)

Market for goods and services Roles

• Households buy

• Firms sell

• To Government:

  • Buys (government spending)

  • Received goods and services

Market for factors of production

Place where producers buy items needed to make goods and offer services

Market for factors of production Roles

• Households sell

• Firms buy

• To Government:

  • Buys (government spending)

  • Received factors of production

Market clearing price

Price at which all goods and services are exchanged for money and sold

Market is empty

No buyers, no sellers, no products and no money

Two ways money are received (dark green/outside arrows)

• Paid for goods/services received

• Received for providing factors of production (working at a job for most people)

Two ways for goods/services & factors of production (black/inside arrows)

• Goods/services received after buying

• Factors of production received after buying

Leakage

Money that is removed from the circular flow diagram; would have moved along outside/green arrows

Injection

Money that is moved into the circular flow diagram; added to the dark green arrows

Government Taxes (Leakage or Injections)

Leakage from

Government Spending (Leakage or Injections)

Injection into

Government Transfer (Leakage or Injections)

Injection into

Financial Savings (Injection or Leakage)

Leakage from

Financial Loans (Injection or Leakage)

Injection into

International Exports (Injection or Leakage)

Injection into (money received for goods sold to rest of world)

International Imports (Injection or Leakage)

Leakage from (money sent to rest of world for goods received)

International Lending to US (Injection or Leakage)

Injection into (foreign person/bank loans USA money)

International Lending to the World (Injection or Leakage)

Leakage from (USA loaning money to rest of the world)