My student, Marikit R. Lampa, used a classroom simulation game to help her college students in Economics 101 understand the circular flow of economic activity.
“When I found out that their background in economics was the one subject they had in high school, which they didn’t really understand,” says Lampa, “I decided that they should not only enjoy the discussion, but should have a better economic know-how. Some of my former students are now teachers themselves.”
Lampa used as basis Jason Welker’s “Lesson Plan—The Circular Flow Simulation” [http://welkerwikinomics.com/blog/2010/09/08/circular-flow/].
One of its basic economic models is the circular-flow model. It describes the flow of money and products throughout the economy in a simple way. The model represents all the actors in an economy— households, firms, government and the foreign sector interacting in different markets by exchanging goods and services, productive resources and money.
Divide the class into four groups: Households, Firms, Government and Foreign Sector. Note how many students are in each group. Make as many bundles of money and resources as the number of students. Print out play money (using genuine Philippine bills) and print out resource certificates as Land, Labor or Capital.
If you have 24 students, each group has six members. Divide the money equally into four envelopes (but with different denominations, some with more money than others) and divide the resources into six envelopes (with a different combination of land, labor and capital). Do not worry that some Households will have more or less resources, or Firms have more or less money than others. That is how it is in real life.
Explain to the Firms that they want to start a business to produce a good or service, so they need to get land, capital and labor. Explain that they want to maximize profits in the Product Market by minimizing costs in the Resource Market. Therefore, they must get land, labor and capital at the lowest cost possible and sell their goods and services for the highest price possible.
Households seek to optimize incomes in the Resource Market to maximize their consumption of goods and services in the Product Market. So households should try to sell their resources for the highest price possible and buy products at the lowest price possible.
Distribute different amounts of money to the Firms. Each Firm should know how much it had at the start so it will be able to tell if it profits or loses at the end.
First comes the Resource Market. To produce a product, firms must acquire land, capital and labor.
The Firms and Households meet in the market. For 10 minutes, let the Firms bargain for and acquire as many resources as they can with their limited capital from Households. Encourage the Firms to look around until they find a Household willing to sell its resources for the lowest cost, or until Households find a Firm offering the highest price.
When the firm runs out of money, have the entrepreneur come to the factory (the teacher) where he or she can exchange the resources acquired for “Goods and Services” certificates, equivalent to three resources mentioned earlier. All unsold or unused resources are put aside.
For the Product Market, remind Households to acquire the most goods and services possible—spend money but get the lowest prices possible. Remind Firms that they want to make a profit, so they must now sell their products at the highest prices possible. Give the students 10 minutes to buy and sell goods and services. Encourage Households to shop for bargains.
Ask Firms to tally profits or losses. Determine how many resources were unsold or unused. Do the same for goods and services. Discuss the two-sector circular flow model, assuming the Households own all resources, selling these to the Firms, earning rent on land, wages for labor and profit and interest for their capital. The Firms then use the resources to produce goods and services, which the households buy.
Modify the first activity by asking Households to set aside a portion of their incomes for savings and Firms a portion of their profits for investments, which will be deposited with the bank (the teacher, repository of savings and investments).
Add the third sector: Government, which taxes Households and Firms. Tell students Government will collect a 10-percent tax, the money to be used to buy goods and services from both Households and Firms. Explain that Government also gives back money as benefits and pensions to Households and subsidies for Firms.
Enter the Foreign Sector. Divide the fourth group into two —one-half imports, the other half, exports. Let Households, Firms and Government buy goods and services from the Import and Export groups.
“My students had a hard time understanding why Imports were called outflows and Exports, inflows, as the names seemed contradictory,” says Lampa. “I told them about the Philippine Basketball Association import players … Literally, they are imports, paid … to play here but spending part of their incomes abroad (sending money to families or purchasing goods in their countries), resulting in outflows of money. As for exports, I reminded students of overseas Filipino workers who … send [the money] to their families in the Philippines (monetary inflows).”
After the students have simulated the flow of economic activity, discuss the four-sector model in economics textbooks or such sites as Jodi Beggs’s “The Circular-Flow Model” [http://economics.about.com/od/economics-basics/ss/The-Circular-Flow-Model.htm] or S-cool’s “The Circular Flow of Income” [www.s-cool.co.uk/a-level/economics/aggregate-demand-and-aggregate-supply/revise-it/the-circular-flow-of-income].
E-mail the author at email@example.com.