Circular Flow Model Basics
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Circular Flow Model Basics
📚 Understanding the Circular Flow Model
What is the Circular Flow Model?
The Circular Flow Model shows how money moves around in an economy. It has two main groups:
1. Households - These are families and individuals (like you and me)
2. Businesses - These are companies that make goods and services
How does money flow?
• Households give labour (work) to businesses
• Businesses pay households wages (money for work)
• Households use wages to buy goods and services from businesses
• This creates a circle - money keeps moving around!
Draw and Label the Circular Flow:
In the box below, draw a simple diagram showing:
• Two boxes: "HOUSEHOLDS" and "BUSINESSES"
• Arrows showing: Labour → Wages → Spending → Goods/Services
✏️ Comprehension Questions
The circular flow shows that money _____________ around the economy between _____________ and _____________.
a) Labour that households provide: _________________________
b) A good that businesses sell: _____________________________
c) A service that businesses provide: ________________________
💭 Think and Discuss
Scenario: The government introduces a new tax on all businesses in New Zealand. Businesses must pay $500 extra tax each month.
Think about how this might affect the circular flow. Consider:
• Will businesses have more or less money?
• How might this affect wages paid to households?
• What could happen to prices of goods and services?
Write your answer below:
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