Question

1. Below is an expanded version of the Circular Flow diagram, which you were introduced to in Chapter 1 of the text. Print it out and label the parts - the ovals, the squares, and the arrows. Pay particular attention to the direction the arrows are flowing, and what they are flowing to/from.

Answer 1

The circular flow diagram represents the simple working of the economy where there are two participants the households and the firms. The households provide the factors of production such as land, labour, capital and entrepreneurship and in return they receive the factor rewards in the form of rent, wages, interest and profit. The firms produce the goods and services with the given factors and these goods and services are consumed by the households , the households pay for the firms in terms of money.

Goods and services purchased Goods and services sold Product market Spending Revenue HOUSEHOLDS FIRMS Wage, interest, rent and profit Income Factor market Land, labour, capital and Entreprenuership Inputs for production

Here the expanded version of the circular model version, the inner arrows show money flow and the outer arrow shows the real flow.