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    Circular Flow of Economic Activity

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    Shinji
    The document describes the circular flow of economic activity between households and firms. There are two main circular flows - the flow of goods and services from firms to households in exchange for household income (wages, interest, rent), and the reverse flow of income from households back to firms through consumption expenditures. The circular flows illustrate how income is generated through the production and sale of goods and services, and how it flows back to economic agents in a repeating cycle. Government and foreign trade can also influence the basic circular flow model.

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    Download as PPT, PDF, TXT or read online from Scribd

    Circular Flow of Economic Activity

    Uploaded by

    Shinji
    2K views16 pages
    The document describes the circular flow of economic activity between households and firms. There are two main circular flows - the flow of goods and services from firms to households in exchange for household income (wages, interest, rent), and the reverse flow of income from households back to firms through consumption expenditures. The circular flows illustrate how income is generated through the production and sale of goods and services, and how it flows back to economic agents in a repeating cycle. Government and foreign trade can also influence the basic circular flow model.

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    The document describes the circular flow of economic activity between households and firms. There are two main circular flows - the flow of goods and services from firms to households in exchange for household income (wages, interest, rent), and the reverse flow of income from households back to firms through consumption expenditures. The circular flows illustrate how income is generated through the production and sale of goods and services, and how it flows back to economic agents in a repeating cycle. Government and foreign trade can also influence the basic circular flow model.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    2K views16 pages

    Circular Flow of Economic Activity

    Uploaded by

    Shinji
    The document describes the circular flow of economic activity between households and firms. There are two main circular flows - the flow of goods and services from firms to households in exchange for household income (wages, interest, rent), and the reverse flow of income from households back to firms through consumption expenditures. The circular flows illustrate how income is generated through the production and sale of goods and services, and how it flows back to economic agents in a repeating cycle. Government and foreign trade can also influence the basic circular flow model.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 16

    CIRCULAR FLOW

    OF
    ECONOMIC ACTIVITY
    Basic Economic Activities:
    • Production – the use of economic resources in the creation of
    goods and services

    • Consumption – goods and services produced are ready


    for use
    • Employment – the use of economic resources in production.

    • Income generation – the price paid to the resource owners


    either by rent, interest or labor

    2 Economic Units:
    2. Household - the basic consuming unit
    3. Firm - the basic producing unit
    The Stock and Flow Variables
    Flow - a quantity measured over a particular
    period of time
    Stock - a quantity measured as of given point in
    time
    The concept of stock and flow measurements are essential in
    understanding the economic variables of Wealth and Income

    Wealth - anything of value owned


    Income - is the flow and the rate of which we earn
    money
    The Economic Model of Production

    The Circular Flow of the Production Process

    ECONOMIC RESOURCES

    ( Land, Labor, Capital)

    HOUSEHOLDS PRODUCING UNITS


    (FIRM)

    GOODS AND SERVICES

    Circular Flow of Goods and Services moves in clockwise


    Circular Flow of Goods Among Production Units
    and Households
    3 types of firms:
    1. Raw material Firm
    2. Intermediated good Firm
    3. Final good Firm

    Interrelation between Production Units and Households

    Resources Raw Material Firm

    HOUSEHOLDS Resources Intermediate good Firm

    Resources Final good Firm


    Circular Flow of Income

    Income Flow of Wages, Interests, Rents

    HOUSEHOLDS PRODUCING UNITS

    Purchase of Goods and Services

    Circular Flow of Income is in counter clockwise. The flows of income and


    consumption expenditures involves financial transactions because of the
    payment of money.
    Circular Flows of Physical Goods and Money Income

    Purchase of Goods and Services

    Economic Resources

    HOUSEHOLDS PRODUCING UNITS

    Money Payments (Rents, Wage, Interest)

    Goods And Services


    The Circular Flow of Goods and Income of Households and
    Firms, with the Government and Foreign Countries

    GOVERNMENT
    Wages, Rents, Purchase of
    Interest Goods and
    Services
    Purchase of Goods and Services

    Economic Resources

    PRODUCING UNIT
    HOUSEHOLDS

    Money, Payments (Rents, Wages, Interest)

    Goods and Services

    Money payments Money payments


    for Exports for Imports
    FOREIGN COUNTRIES
    INFLOWS AND OUTFLOWS

    What are the Outflows in the Consumption stream?


    1. Savings
    2. Taxes
    3. Imports

    What are the Inflows in the Consumption stream?


    1. Investment
    2. Government spending
    OUTFLOW:
    Savings:
    Households do not spend all their income for consumption.
    A portion of income is saved. If there are no other demand
    aside from that of the household, the business firm would
    not be able to sell their goods and services.
    Taxes
    Households have to pay the government on their income tax.
    When households pay taxes, the effect is lessen disposal
    income and lessen consumption
    Imports
    When we buy from foreign countries, the amount is spending
    on the part of household. But the expenditure flows into the
    foreign countries.
    INFLOW:

    Investment
    Money deposits in the banks are used for
    investment on business firms and lending them
    to people. If investments is equal to savings, it
    offsets the outflow of savings.

    Government Spending
    Government uses the taxes collected from the
    households to defray expenses in
    infrastructure, social services, education and
    economic development. These amounts are
    spent back into the flow.
    INFLOW:

    Export
    Income derived from export is returned back
    into the flow in the form of income to household
    and business firms and taxes to the
    government
    Take Note:

     When OUTFLOWS is taking place in the


    economy, recession of economic activity is
    bound to experience
     OUTFLOWS = INFLOWS, level of economy is
    maintained
     Excess INFLOWS over OUTFLOWS will be
    expansionary and results in increase in level of
    economic activity
     Excess in OUTFLOWS over INFLOWS will make
    contracting effect and results in decrease
    economic activity
    3 Sets of Policies that may be Implemented

    1. MONETARY POLICY that which affects savings


    and investment
    2. TRADE POLICY that which affects countries
    exports and imports
    3. FISCAL POLICY that which controls taxes
    (revenue) and government expenditure

    Government applies policies in accordance with its goals.


    Policy may be “EASY” when the aim is for expansion. Policy
    may be “TIGHT” when there is a need to restrict the circular
    flow by making less funds available to the economy.
    END
    Circular Flow of Income Among Production
    Units

    MONEY PAYMENTS FOR RAW MATERIALS

    RAW MATERIAL FIRM INTERMEDIATE GOOD FIRM

    Money Payments For Intermediate


    Goods

    FINAL GOOD FIRM


    Money Payments for Final Goods HOUSEHOLDS

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