What is the difference between resource markets and product markets in a circular flow model?

Economists use the circular flow model to illustrate the movement of money, resources, and products (or services) through the economic system. In the product market, households purchase products or services from corporations. In the resource market, corporations purchase resources (including labor and raw materials) to make products.

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A circular flow model describes how money, resources, and goods (or services) move from households to corporations and back again. On one side of the model, we have the product market. Corporations make products or provide services that they sell to households (or the government or foreign markets) for money.

On the other side of the model, we have the resources market. Households provide resources to corporations, especially in the form of labor, in return for wages, which are then used to purchase more products in the product market. The resource market also includes the exchange of money for land or raw materials needed to produce products.

Let's look at an example. A family is shopping for a new computer. They do a lot of research and determine the best machine for their needs, and they then order it online and pay for it using a credit card. The computer manufacturer obtains the money paid and ships the computer to the family. This is what happens on the product market.

On the other side of the circular flow, we have what happens with the computer manufacturer. To produce computers, the company needs raw materials (plastic cases, computer chips, etc.) that it purposes from other manufacturers. It also needs land for a factory (which it already has), and it needs labor (so it pays wages to workers from households). This is the resource market.

If the father of the family who bought the new computer actually works for the computer manufacturer, the two markets combine in him. He receives wages from the computer manufacturer (selling his labor on the resource market), and he uses part of those wages to purchase the new computer (in the product market).

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The resource and product markets are explained in their respective names. They each play a vital role in the cyclical flow of business, but they are distinct and clearly separate. The product market, obviously, deals with products and physical goods. The resource market, on the other hand, deals with resources and the means of production of goods.

For example, let's take a look at the food we eat. Chicken, corn, fish, and the like are all products that we purchase and consume. These are exchanged on the product market. However, there are resources needed to cultivate, grow, or capture these products—most prominently farmers and workers, but also technology, human resources, salesmen, and much more. These people all contribute behind the scenes to creating a product for consumption. They are part of the resource market. Without one or the other, the economy would fail—because they complement and support one another.

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The resource and product markets are both halves of the circular flow model of business—both are necessary and complementary, and without either, the economy would fall apart.

The product market is easy enough to understand—it is the marketplace that is predicated entirely on the goods that are bought and sold (products). The resource market, however, is different in that it is focused primarily...

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on the skills and abilities that are intangible and immovable.

The resource market deals with people performing job functions—such as a designer who intends to create a product or a manager who helps to guide the team through marketing and selling. The resource market helps create the products that are then sold and exchanged on the product market, which will create more money to hire individuals through the resource market, and so on. It is a cycle—hence the circular flow model, and it entails both aspects.

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The difference between a resource market and product market within a circular flow model is actually defined in the name of both. In the resource market, that is where resources are obtained in order to produce or manufacture a certain good. Resources can range from anything from natural resources, to human labor, to capital, and even technology. Resources are what is necessary to begin creating a product and ultimately manufacturing and finishing it.

The product market however, is where the produced goods are after being completed. When a good is produced, it will move over to the product market to be bought and sold to consumers by sellers or manufacturers.

This will be easier to understand with an example. For instance, say we want to sell a product. Let's look at how Apple sells it's Macbooks. Before landing in the hands of a consumer, Apple needs to gain the resources in order to create the laptop. Thus, they will gather engineers, technicians, computer parts, the technology that goes into the Macbook, and the other needs that they may find they require. After gathering all the resources, it goes into production until it is finished and ready to be sold. Once it is, it will be placed on the market for a consumer to buy and for Apple to profit off. 

This is what is meant by the resource and product market within a circular flow model.

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The basic difference between these two is that the resource market is the market for things that are used to make other things while the product market is the market for the things that are produced.  The resource market, for example, includes the labor that is used to make cars but also the glass and the steel and the other things that go into the actual car.  The product market, then, is the market in which the cars are sold to consumers.

So, product markets are the ones where goods and services are bought and sold.  Resource markets is where businesses buy the things that they need in order to produce the goods and services.

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