this video we are in economics grade 12 and we are looking at the topic of the cirular flow and what we are going to do is we're going to cover it in full starting with the participants in the cirular flow the real and money flow the public goods the injections and the withdrawal also known as leakages we are also going to look at the market and we are then going to do an exam question that will show us how this topic is tested in your examination especially the term one test also known as the much test so make sure that you have your notebook you are ready to take some notes so that you can take notes first and then in the end we will then look at those question papers to see how to apply what you have taken in your notes into a real question paper so the circular flow is our topic and that's what we are going to start with we are going to start with a closed circular flow and we are going to look at how how it looks like so you see there that we have four participants uh we have households businesses Factor markets and product markets so really it's two participants and two markets so the first participant being the household so when it comes to the household we know that we are talking about the consumers we are going to talk in full about them but just know that in with households we're particularly talking about the consumers the ones that buy but also the ones that sell faes of production because they are also our workers so you will see there with that arrow that shows the goods it shows Goods moving from product markets going to them because these people are our consumers so they use their money to buy goods from product markets or also known as Goods Market and they consume those goods so Goods flow from the product Market to them and then they also uh sell their resources to factor markets by resources we mean their factors of production so if you know your factors of production which we are going to look into it at the later stage those are all the factors that the households they own because they are the ones that can sell them to the factor market they sell them to the factor market who then sells them to the businesses as inputs so these uh factors they move from Factor markets to businesses which meaning businesses are the ones who will employ household and then pay them an income which that income they will then use to buy consumers you see how it goes back so those factors of production that are coming from the factor market we call them the inputs because they are an input into a business we are inputting them into our production process because businesses are the ones who will now produce Goods that will go to the product market so you see now the goods are moving from the businesses to product markets when they get to the product Market they will then be sold to household and you see it's a full complete circle so when you are explaining this participants it's easier when you're explaining them as in relation to each other because then you'll never run out of points the other participant that is most important we find it at the center and that becomes the state by the state we are talking about the government the government has things that it's giving to the household and things that the household is giving to the government so for example the government giv public goods what we call public goods to the government we are talking about things like the um free health care free education those are public goods that are going to the households to the businesses they're giving things like subsidies meaning grants to help them with their production cost and then both the businesses and the households what they give in turn to the government is the taxes so businesses pay business or company Tax household pay personal income tax to the government so when you are given for example a question or an essay in particular and you are asked to describe a your participants the first participant you're going to say you have households and what are you going to say about households I always say to my students that when you are dealing with an essay in particular make sure that you at least have five points that you can give so my first point there is that they buy goods and services from product markets they own and sell factors of of production to the uh Factor markets they then receive remuneration in a form of wages interest and rent and profit and then they pay taxes to the state and the government and also receive um public goods from the state so you have to make sure that when you're talking about a household you are describing how they relate to every other participant that makes it easier for you to be able to describe the participant of a household we are going to do the same thing for businesses so you will see that when we describe businesses we are going to describe how it relates to factor markets to household to the state and to the product market so we say the businesses are also known as the firms uh they buy factors of production from households in the factor market they use the factors of production to produce goods and services they then sell the goods and services to the households in the Pro product Market which are also known as the Goods Market and then they pay taxes to the government and they receive subsidies from the government if you're not aware of what subsidies are there are these grants that business government gives to businesses to help uh reduce the cost of production or to make their production to be more green meaning more sustainable to the environment so sometimes when we are looking into things like the environment for the businesses to not be wasteful it would cost them a lot more than they are making so the bus the the government will then come in and help them with what we call subsidies to help them with their production process we then now are going to move into describing now the role of the state or the role of the government again we are going to stay related to all the other participants so when we are talking about the state we're talking about the government we are also talking it's the same thing as the public sector and know that public sector also stands as a topic which we are going to do in the next coming video so be in the lookout for that make sure that your notifications attend on for that and while we are still here might I also add make sure that you subscribe so that you will be notified when we post the topic of public sector so anyway the public sector what does the public sector do they provide public goods such as Education Health housing to households they Prov provide subsidies to businesses those are those subsidies we said they help them reduce their cost and then they also collect taxes from households and businesses this taxes they then you is what they use to be able to provide the public goods and the subsidies so basically it's a sec hence we are dealing with a cirular flow now when you're looking at our circular flow that was a closed Market circular flow meaning we are just now moving in the country but now when you start involving other economies of other countries that's where we now have the foreign sector which becomes the fourth participant in our circular flow so we are going to now discuss the role of the foreign sector so foreign sector we are talking about foreign countries that we are trading with in terms of imports and exports so they help us because they buy from us but then they we also help them by buying from them so uh how do we describe our foreign sector we say there is a flow of goods and services from the foreign sector which is other foreign countries to our product market so when they get into the country they get into the Goods Market or the product market and because they are coming from other countries to our country we call them Imports so we call them in a form of imports and then there is a flow of goods and services from the product Market to the foreign sector as exports and then the Imports are an expenditure and the exports are an income in the economy of our country so we make money from exports but we spend on Imports then we are going to now discuss what is the difference between what we call a real flow and a money flow so when we are talking about a real flow we are talking about a flow of goods and services so this would be the lines that are in Red so you will see in that one that the arrow is pointing as it's the flow of res sources meaning the factors of production from households going to the uh factor market in input it's the same factors of production moving from Factor markets to businesses and then we are also looking at money flow money flow is the is the flow of revenues that are moving from uh the product Market going to the businesses this is where households are now buying what they're going to consume which means to the businesses this becomes Revenue it becomes an income we also have a cost that you will see moving from businesses to the factor market that cost is the wages that we are paying to the household so we are going to describe it proper in full as we are describing what is real flow so real flow we have it's the flow basically of factors of production and also of goods and services so let's start with our factors of production factors of production flow from households to businesses through through the factor market goods and services flow from businesses to households through the product Market factors of production and goods and services flow from foreign countries to ours as Imports and then the same factors of production and goods and services flow from our country to other countries as exports so basically real flow we are talking about the flow of everything else that is not money meaning anything else that is a service in terms of factors of product ction meaning this is the workers that are now going to work to in our businesses or going to work in foreign countries and the goods that are going to the households and coming into the country as Imports so when we now look at the money flow we are talking about the flow of all things money whether in terms of an income or in terms of a cost so we are going to start with businesses businesses pay remuneration for factors of production with wages interests and profit so basically we are saying that businesses as much as they receive factors of Productions from households they need to pay for them this becomes a cost to the business and it is money that they are paying to the household in terms of uh wages and profits and then we have households receive remuneration as an income from businesses so this becomes their salaries and their wages that they can now use for consumption and then households use their income to buy goods and services from businesses in the product market so they will go and spend the money that they have spent and then businesses and households pay taxes to the government that is still a flow of money because taxes are still money with the addition of those taxes that we just talked about and the Imports in and exports in the foreign sector you can see uh the real uh flow and and the money flow in full in our diagram there and so we are going to discuss now the division of money flow and real flow into injections and withdrawals also known as leakages so all of those real flows and money flows they can be divided into injections and withdrawals the our injections are investments government spending and exports whereas our withdrawals are savings and taxes and all as well as Imports now when we go back to e injections this investment who makes Investments is businesses who make investments they invest into the uh financial sector which we are going to discuss at a later stage so businesses make investments it's the government that does the spending what do they spend they spend the uh public goods and then as well as the exports we are saying their injections because all these three things they bring money into our economy hence we are saying they're injecting money into our economy withdrawals it's in the name they are going to withdraw money from the economy so for example households when they receive their money and they decide to save it that withdraws money from the cirular flow it means that that money is no longer circulating because that person decided instead of using their money to buy goods and services they decided to save it so that means that it's not doing anything it's not even anying an interest in most times so they're just saving it and then taxes as well taxes are being it's money that is being taken from businesses and households that they could have used to uh circulate in the economy and then exports this money leaving us literally to pay for expenditure from foreign countries we then have to now also discuss you will notice that we discussed everything else but we did not discuss factor market and product Market is because they're not necessarily uh participants but rather they are markets so to discuss uh factor market and product Market we then have to get into the discussion of markets so what is a product Market a product Market is also known as the good Market where consumer goods and services are being exchanged buying and selling goods and services produced in the market so basically we are talking about the uh a market where you will find goods and services being exchanged for money between participants in the circular flow or in the economy and what is the factor market the factor market is where factors of production are being traded traded meaning you are giving something for something so we give them our services as employees and they give us wages as a a trade or as an exchange natural resources labor capital and Entrepreneurship are traded in the market so those are TP are some of the types of the factors of production we are talking about natural resources labor capital and Entrepreneurship this is if you remember well if you're still remembering your grade n education well you did factors of production and their remuneration hence when we are talking about their remuneration you will see we mention wages uh we me profit and interest is because those things are what you get for this factors of production but then those are not the only markets that we have we also have our foreign sector which gives us the foreign market and then we also have the financial Market which is where those businesses remember we said the Investments are being invested in financial sector that means our banks and our financial institutions so the financial sector is divided into the money market and the Capital Market the money market is where short-term loans and funds are being borrowed and saved so remember when weal when we were discussing withdrawals we said that the first withdrawal is savings where do we save we save in a bank and savings are usually a short-term fund so those savings are done in the money markets because you are doing things for shortterm and whereas when you are now looking for long-term loans like like mortgages or the type of loans that businesses loan we are now looking at the capital markets so that's why it says the capital markets are for long-term loans and for long-term funds such as investment so if a business has some money that it wants to invest it will invest it in the financial market and then we also have the foreign exchange markets so the first thing that happens in the Foreign Exchange Market is that businesses have to buy foreign a currency why do they have to buy a foreign currency is because when you're wanting to import Goods into the country let's say you're trying to buy coffee beans from Rwanda for example you would now have to buy them from a business in Rwanda a business in Rwanda uses the currency in Rwanda so that means you will have to take your rents your South African rents and change them to the currency in in Rwanda for you to be able to buy those uh coffee beans and Export them into the country and then some we also say imports and exports are traded in these markets to trade those import and exports you have to now exchange currencies now look at a question from a March test question paper a question of circular flow you will find it under macroeconomics and you will see in 3.1.1 it says name two flows in an open circular flow economy so two flows we know that we have discussed the real flow and a money flow so when they say name two flows those are the only two flows that we have real flow and the money flow and then in the next question they're saying Trion 1.2 why is it not possible to exclude individuals from using public goods remember we discussed public goods we're talking about uh free health care and public education for example how can you not exclude an individual from something that is free and to the public it's because they are accessible to everyone that's the first reason the second reason it is possible to prevent one individual to single out one person and say everybody else can can enjoy the free Goods that are for the public except for this person so people get to enjoy those goods as a public hence they are public goods meaning they are released to the public so it's very hard to prevent just one person from receiving something that is for everyone and then 3.2.1 says Identify the participants that own the factors of production we said that those are households SL consumers they are the ones who go and work to the businesses or they sell their factors and of production to the factor markets the second question 3.2.2 says name one public good provided by the state we have been mentioning these public goods as we are coming along we talked about free health care we talked about um public education we also talked about Free Housing you know how rdps so they just wanted one you can select any one of those I said the education or housing can also be free wealthcare if you want and then in 3.2.3 it says briefly describe the term factor market meaning what does factor market mean so basically you know that a factor market is a market where we trade um factors of production so so you can keep your description as simple as that a market where factors of production are sold and bought or you can say a market where factors of production are being traded they are sold by the household they are bought by the businesses for production so you don't even have to go that further because it's only two marks so long as you said a market where factors of production are traded and then in 3.4 3.2.4 it says what is the effect on national income if injections are less than withdrawals remember the injections are the incomes the withdrawals are the expenses this means national income will decrease because it means we have less income and higher expenses meaning there's no money there's not enough money circulating in our economy and we don't even have enough income 3.2.5 says explain the impact of a decrease in taxes on the level of production so what happens if businesses do not have to pay as much tax as they're paying it means that households income will increase which will result in increase in demand if businesses are not paying taxes it means that they can play their employees more which other households and that means the households will now be have enough money to spend meaning they will increase their demand so the level of production now in the businesses will then increase as a response to the demand that is made by this households so it's again cirular flow everything you will notice that it becomes a cycle what happens to the businesses affect the household the reaction of the household will then come back and affect the businesses again hence it's a secular flow meaning that the effect is in a CLE another type of question that you will have for a cirular flow is an essay question in your section c of a question paper you know for your essay the first thing that is important is the structure the introduction which is where you will Define a the body which you will list your subheadings and your conclusions where you will now give your opinion for two marks so it can be a simple two line so let's look at our essay question our essay question is question five again circular floww falls under the macroeconomics it says discussed in detail the Market within the four sector circular flow Market how can the increase in injection impact the South African economy so our main part talks about the uh markets in the cirular flow you have to pay attention to that they're not talking about participants they're talking about their markets so in the introduction you have to define something what are you going to Define since they're talking about Market the simplest thing to um defined there is the market so a market is a mechanism that brings buyers and sellers together to exchange goods and services another thing that you can Define in regards to that main part can be the secular flow you can describe to us what a secular flow is that will also still be a good introduction so long as you have defined something so now that we are done with your introduction we now need to look at the subheadings the subheadings you are going to list the markets that you can find in a four sector Market by four sector we mean uh for the market that has four participants meaning household businesses the state and the foreign sector so what are going to be the markets if those are the participants the first one you're going to have the product or the Goods Market I always say that uh you have to Keep Your Mark allocation in mind so for this particular question these headings are going to have one Mark each so under each subheading you will give three points each because one point is worth two marks so that means that you will get six marks with the one mark of the subheading you will get seven marks for each subheading so that means that when you have four subheadings you're getting seven * 4 so you should be able to cover that 26 month marks without a problem if you stick to the three points each rule so you're going to Now list your markets we have a product and Goods Market you're going to give three points from what you have already taken in your notes just as you have taken it in your notes under the product Market what is a product Market how does it connect the participants and how does it connect as well to the other markets what do we do in that market your first point could even just be defining what a product Market is a market where goods and services are exchanged the same thing you are going to do with your Factor markets as well as with your financial markets and foreign exchange markets then the next part is going to be the additional part of your essay which is the second bullet point and it says how can the increase in injections impact on the South African economy so we are talking about injections remember we said that the injections are the things that are income to the their economy so we are talking about Investments That businesses make because Investments and an interest that circulates and they can even pay more tax from it we're talking about government spending government spending uh includes things like subsidies and giving improving people Social Development and then we are also talking about exports exports is other countries buying goods from our country so that gives us more business and it gives us our businesses in this country more Revenue which means they can even pay more taxes and we have even much more money circulating in the economy so having those things increase meaning the increase in Investments the increase in government spending and the increase in exports what does that do for our economy so let's start with an increase in investment it will help establish businesses which will increase employment because when businesses are doing well it means production levels are going higher that means we need more employees to work the production it will also increase the tax revenue because the more income businesses make the higher the taxes they can pay and then that leads us to the increase in government spending which is our Point number three and we say increase in government spending will help improve Social Development and infrastructure because the government has more money to spend now then government subsidies will help reduce production cost and then increase in exports may result in the appreciation of the value of rent remember we said when you are buying into a country you need their currency the demand of a certain currency increases the value of that currency so the value of that currency will then appreciate so this then covers all of the possible questions that you can have with a cirular flow if you have any other questions make 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