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Presentation on The

Circular Flow of Money

Prepared By

IMRAN ALI KALWAR

2K6ME14

Assigned By

SIR ASHFAQUE AHMED

MEMON

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The Circular Flow of Money 2

DISCUSSION

The circular flow diagram is a simple illustrationto show how income/money flows through the

economy between producers and consumers. The

diagram makes it clear that consumers and

producers are interdependent. Consumers rely onproducers to make goods and services available.

When consumers buy products, money flows to

producers. At the same time, producers rely onconsumers to provide labor for production. When

labor is provided, people get paid and that allows

them to buy goods and services.

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The Circular Flow of Money 3

The circular flow diagram starts with twoeconomic decision units, the household and

the firm. These two entities capture theideas of consumption (household) andproduction (firm).

The diagram goes on to illustrate the flowof money between the two sectors of theeconomy. Consumers buy goods andservices from firms, but firms pay people

for their labor. This exchange of moneytakes place in two different markets, theresource market and the output market

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The Circular Flow of Money 4

The resource market is that where firms buy the

materials and labor that they need to produce

their product. A firm is required to producegoods and labor is to run the machines. The firm

then converts these resources into goods that they

sell in the output market.

Households provide labor to firms in the resourcemarket. When we go to work in the morning, we

are participating in the labor market. We earn

money from the firms and this allows us to buy

goods and services in the output market.

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The Circular Flow of Money 5

From The Firms Perspective

Purchasing resources in the resource

market,

Using the resources to produce a good

or service,

Selling the item to others in the outputmarket.

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The Circular Flow of Money 6

From The Consumers Perspective

Providing labor to firms through the

resource market, in exchange for money.

Purchasing goods and services from firms

in the output market.

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The Circular Flow of Money 7

APPLICATIONS

The circular flow diagram represents the totalincomes and total expenditures.

The circular flow diagram represents the total

outputs arising in several sectors of nationsproductions.

The circular flow diagram represents the sum of

all consumers expenditures, government

expenditures on goods and services and also netexpenditures on capital goods.

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The Circular Flow of Money 8

DIAGRAMS

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The Circular Flow of Money 9

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The Circular Flow of Money 10

OBJECTIVES

Students will understand the circular flow

of income in a market economy.

Students will be able to recognize

examples of the flow of income.

Students will be able to develop their own

circular flow diagram for different

products.