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Vocabulary
Circular Flow Model
The following circular flow model will introduce you to the basic structure of our economy. Later in the course, the model will also add the government, banks, and the rest of the world. For now, the basics include identifying the two main payers in our circular flow, businesses and households. Businesses hire resources from the factor marketA marketplace where factors of production such as labor, capital, and resources are purchased and sold. to produce goods and services that they sell in the product marketThe product market is where goods and services produced by businesses are sold to households. . People provide their resources to the factor market as a way to make income so that they can buy goods and services in the product market.
The easiest way to understand this chart is to examine the two sets of arrows. One set of arrows, the green arrows travelling clockwise in the diagrams, describes the flow of money. The second set of arrows, blue going counter-clockwise in the diagram, deals with resources, or goods and services. People provide their resources for money, and businesses provide goods and services to consumers for money. The phrase that helps explain this flow is, "One man's spending is another man's income."
