Explanation and Diagram of the Circular Flow Model

     A Circular Flow Model shows interactions between households and individuals and how they interact with businesses in the free market. For example, a person works for McDonalds and makes $7.25 a hour. He decides to spend four dollars on a Angus Third-Pounder for lunch. The money is paid to McDonalds which allows them to pay their workers more. The worker operates the drive-thru and provides labor for McDonalds. The production input allows more goods to be sold.

The outside of the model shows the trade of moeny and capital, while the inside shows the trade of goods.

The Product Market is where goods and services are produced by businesses and bought by households. Businesses are paid which allows them to buy more resources and labor to make more products.

The Factor Market is where productive resources are bought and sold. Workers sell labor for money, landowners allow others to rent their land, and stockholders exchange for intrests.


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