Video Transcript: Lesson 5

The circular flow model will be our topic of discussion in this video for Unit Two.  We'll start in the foreign sector, imports, exports. We'll start in the center with the product market. You can see that the flow begins with revenues from the product 

market. So, as consumers purchase products from the market, revenues will  then go to firms. Firms will then use that revenue to purchase more resources  inside the resource market. So, they will have materials to produce whatever it is they're producing to put it back into the market. So then households will then  purchase those goods, which will then go back to the firms as revenue, and you  can see the cycle from the product market to the firms to the resource market to  households, and it's just a continual circular model, right? But now we'll look at  the output, right? We'll look at goods and services were from the product  market, goods and services were purchased by households. Therefore, the  income. So, therefore, households must have an ability to buy these goods and  services. So, therefore, they must have income, wages, right, or maybe even  receive interest payments or dividends, right. Therefore, that will go into the  resource market again, which will lead to the land, labor, and capital needed to  create goods and services, which will lead to the factors of production, right?  That is done by firms in order to create the goods and services or the output that the product market will need to operate. Now that is on the aggregate level on  the private industry sector inside a normally functioning economy. Now let's look  at the government sector. They do two things: they tax income and they provide  goods and services that is good for the public. So through the taxation of our  income from our wages, the government uses that tax that tax revenue to  produce utilities and other things that are used for the public good in order to  make a more well-rounded, flowing, balanced economy that makes it efficient  and effective for not only producers but consumers to interact inside the  marketplace.