Circular Flow & Money

SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.

a) Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

b) Explain the role of money and how it facilitates exchange.

Government needs to be added to our diagram.

Goods/services provided by government.

Government gets money from taxes from households/consumers and businesses/firms.

Direct exchange of goods and services between people without use of money.

1. Money is portable (easy to carry). Gold is heavy. Would it be easy to carry salt?

2. Money is divisible (easy to divide). $10 is worth ten $1 bills. If something costs $7 we

don’t split a $10 bill or cut it up to come up with the amount needed.

3. Money is durable – long lasting. They don’t tear easily; ink doesn’t run; can even wash & dry it!

4. Money is generally accepted. A dollar bill can buy things in Atlanta, St. Louis or Los Angeles.

Characteristics of money: P – PORTABLE A – generally ACCEPTED D – DURABLE (long lasting) D – DIVISIBLE (easily divided)

1. It is a medium of exchange (means of trade) Valuable because it is accepted in

buying/selling goods & services. Money makes trading easier than it would be

with barter.

2. Money is a store of value. Money is a way of storing wealth. You work

today, you get paid in money and wait to spend it in the future.

3. It is a measure of value. Money can be used to state how much

things are worth. Value of goods and services can be expressed in money prices, allowing for easy comparisons.

Role of Money: ME MV SV

Money makes it easier and more efficient for people to transfer ownership of goods and services.

Money offers an incentive for many people because it represents potential ownership of things of value.

Prices when expressed in terms of money help people easily understand the value of things.