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The Circular Flow Model
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This is you! You’re headed out to spend the day with friends.
You and your friends decide to go to the local grocery store to
buy some potato chips before heading over to your friend's
house.
You may not realize it, but you’re going to set off a chain of
events that economists call the “Circular Flow Model”
It isn’t quite as complicated as it sounds. Let’s explore!
Grab the bag of chips and drag
it to you so you can take it to
the cash register. Then hit the
“next” button
You have to pay for the chips
so…drag the money over to
the register, then hit the “Next"
button
You’re now able to enjoy your chips
with your friends, and the owner
of the grocery story has money!
You exchanged MONEY for GOODS
The Store Owner now has to do two things: Buy more potato chips (you bought the last bag!) and pay his employees. To do this he uses the money he made in sales that day (including what you gave him) Drag the money to both the factory and the employee then hit the next button.
Click on the factory or the person to learn more about what happens next. When you’re done hit the next button.
The factory needs to buy more potatoes. This is purchasing a GOOD, this time from a potato farmer. The factory also needs to pay its workers who provided the SERVICE of processing them. In this very simple scenario, Your father actually works for the potato chip factory! Drag the money bags to the potato and to the factory worker.
The grocery store employee takes his paycheck and uses it to…buy groceries! One of the things he chooses to buy is potato chips (which starts this whole crazy mess all over again!)
After coming home from the potato chip factory, your father notices how well you did the chores he asked you to do. When you get home from your friend's house, he pays you your allowance. Drag the money back to you...
The grocery store
took your money in
exchange for the chips and
used it to buy more and pay their
employee
Your father used his paycheck
to pay you for doing your chores
You (The consumer)
use your allowance
money to buy potato
chips.
The grocery store employee
ued the money he got in
exchange for work to buy
groceries…including potato chips
Recap
The factory bought more
potatoes to make more chips.
They also paid their employees
including your dad.
Circular Flow is an important economic concept and can get
much, MUCH more complicated than the brief illustration
we gave you here. You’ll continue to learn about it as you go
through school