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    The Circular Flow of Economic Activity (Autosaved)

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    Littleagle
    The document summarizes the circular flow of economic activity between households, firms, and the government. It describes the flows of goods, services, and income between producers and consumers in a closed economy. It then expands on this basic circular flow model to include the effects of savings and investment, as well as flows to and from foreign countries and the government sector. The key aspects of the circular flow model - production, consumption, and the exchange of goods, services and money - form an interconnected system that is crucial to understanding macroeconomic equilibrium.

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    The Circular Flow of Economic Activity (Autosaved)

    Uploaded by

    Littleagle
    183 views19 pages
    The document summarizes the circular flow of economic activity between households, firms, and the government. It describes the flows of goods, services, and income between producers and consumers in a closed economy. It then expands on this basic circular flow model to include the effects of savings and investment, as well as flows to and from foreign countries and the government sector. The key aspects of the circular flow model - production, consumption, and the exchange of goods, services and money - form an interconnected system that is crucial to understanding macroeconomic equilibrium.

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    economic flow

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    The Circular Flow of Economic Activity [Autosaved]

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    The document summarizes the circular flow of economic activity between households, firms, and the government. It describes the flows of goods, services, and income between producers and consumers in a closed economy. It then expands on this basic circular flow model to include the effects of savings and investment, as well as flows to and from foreign countries and the government sector. The key aspects of the circular flow model - production, consumption, and the exchange of goods, services and money - form an interconnected system that is crucial to understanding macroeconomic equilibrium.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    183 views19 pages

    The Circular Flow of Economic Activity (Autosaved)

    Uploaded by

    Littleagle
    The document summarizes the circular flow of economic activity between households, firms, and the government. It describes the flows of goods, services, and income between producers and consumers in a closed economy. It then expands on this basic circular flow model to include the effects of savings and investment, as well as flows to and from foreign countries and the government sector. The key aspects of the circular flow model - production, consumption, and the exchange of goods, services and money - form an interconnected system that is crucial to understanding macroeconomic equilibrium.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 19

    THE

    CIRCULAR FLOW OF

    CONOMIC ACTIVITY
    Prepared by: Alamillo, Yves L. BSAE 2E1

    THE CIRCULAR FLOW OF ECONOMIC ACTIVITY


    Stock and Flow Concepts The Circular Flow of Goods, Services, and Income The Production Process The Flow of Goods Among Producing Firms Goods and Income Flow Among Households and Various Types of Producers Income Flow The Concept of Equilibrium The Effect of Savings and Investments Flow in a Market with Government and Foreign Countries

    The two basic activities undertaken in any activity

    Production

    Consumption

    Stock and Flow Concepts

    Stock

    Refers to the measure of quantity at a point of time. It is an accumulation of a commodity like gasoline in a fuel tank.

    Flow

    Refers to the measure of movement of quantity over a period of time.

    The Circular Flow of the Goods, Services and Income

    The basic aspects of the economy which include production and consumption are subject to the stock and flow concepts which are circular in nature.

    The Production Process

    The process of producing goods and services involves households and firms in a circular form. These firms, in turn, produce goods and services which are delivered to households for consumption.

    THE CIRCULAR FLOW OF THE PRODUCTION PROCESS


    LAND,LABOR,CAPITAL (Economic Resources)

    HOUSEHOLDS (Resource Owners)

    FIRMS
    (Organizers and User of Economic Resources )

    GOODS & SERVICES (Output)

    The Flow of Goods Among Producing Firms

    This flow involves raw materials, intermediate goods and final goods.

    According to the type of goods they produce, firms may be classified as follows:
    1.

    Raw materials producers like those engaged in producing agricultural products used in manufacturing. Intermediate goods producers like those producing construction materials, guitar strings and food seasoning. Final goods producers like those producing chocolate bars refrigerators and bicycles.

    2.

    3.

    THE FLOW OF OUTPUT BETWEEN FIRMS AND HOUSEHOLDS


    RAW MATERIAL FIRMS
    raw materials

    INTERMEDIATE GOOD FIRMS

    intermediate goods

    HOUSEHOLDS
    final goods

    FINAL GOODS FIRMS

    Goods and Income flow Among Households and Various Types of Producers
    Households provide producers with the economic resources required. These resources are distributed among the various types of producers.

    HOUSEHOLDS

    economics resources payment economics resources payment economics resources payment FINAL GOODS PAYMENT

    RAW MATERIAL PRODUCERS


    INTERMEDIATE GOODS PRODUCERS FINAL GOODS PRODUCERS

    Income Flow
    When money is spent by households for consumption and by firms for production, a circular flow of income is created. The expenditure of one unit becomes the income of another unit.
    Income takes two distinct circular flows as follows: Between household and firms, and Between firms.

    The Concept of Equilibrium


    The economy will be in equilibrium if the amount received by from firms from households is equal to the amount received by households.

    The Effect of Savings and Investments


    If the total output of firms are purchased by the households and total economic resources are bought by firms, there is equilibrium in the market.

    THE CIRCULAR FLOW OF INCOME BETWEEN HOUSEHOLDS AND FIRMS


    Income Flow
    (wages, interest, rents)

    HOUSEHOLDS

    FIRMS

    Income Flow
    (purchase of goods and services)

    RAW MATERIAL FIRMS

    Income flow for purchase of intermediate goods

    FINAL GOODS FIRMS

    Income flow for purchase of intermediate goods

    Income flow for purchase of final goods

    HOUSEHOLDS

    THE EFFECT OF REDUCTION OF PURCHASES


    Reduced Income
    (as a result of Reduced purchases of economic resources)

    HOUSEHOLDS

    FIRMS

    Reduced Income
    (as a result of reduced purchases of goods and services)

    THE CIRCULAR FLOW OF GOODS AND INCOME IN A SIMPLE ECONOMY WITH SAVINGS & INVESTMENT

    FIRMS
    Rent, wages interest, profit Land, labor, capital

    Investments Capital goods

    Goods and services

    payments

    HOUSEHOLDS

    SAVINGS

    FLOW IN THE MARKET WITH GOVERNMENT AND FOREIGN COUNTRIES


    In an economy like the Philippines, there are two important sectors that interact with the households and firms: the government and foreign countries. The government sector which performs necessary functions buys economic resources of land, labour, and capital from households. The goods and services purchased by the government come in a wide variety of forms: from office supplies to transport equipment and from consultancy to janitorial services. Household purchase goods and services from other countries, like transportation equipment, books, computer programs etc.

    GOVERNMENT

    rent, wages, interest

    Land, labor, capital

    payment for goods and services

    rent, wages, interest

    HOUSEHOLDS
    goods and services
    payment for imports

    FIRMS

    payment for goods and services

    payment for exports

    FOREIGN COUNTRIES

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