Question

Please answer all

a.Describe the Simplified Circular Flow Model.

b.Explain how the Simplified Circular Flow Model applies to your life.

Answer 1

(a) Simplified circular flow model:

Circular Flow model is a model that depicts how goods and services flow in exchange for money. It is used to show relationship that is interdependent between households and producers. Major factors in the simple circular flow model are Households and businesses. And there are two markets : factors market and goods and services market. Factors market : It is where the businesses buy the items to produce goods or services.Factors are capital, land , labor and natural resources. Goods or services market : It is where the businesses sell goods and services to the consumer. The below diagram illustrates the circular flow model without including government :

Circular flow model illustrates how in an economy : income must equal production. Because one person's expenditure is another person's income.

(b) Simplified circular flow model applies in our daily transactions. Suppose Jack is a mechanic . He sells his services to Ben . Ben's expenditure is Jack's income . Jack uses some of ben's payment to pay a orker . Then, worker's wages are income to worker but expenditure to Jack. There are many transactions in our day-to-day transactions in which we spend on some good or services and get for some factor , good or services.