THE CIRCULAR FLOW OF ECONOMIC ACTIVITY INTRODUCTORY MACROECONOMICS By: Cristobal M. Pagoso Rosemary P. Dinio George A. Villasis Prepared by: GREGAR DONAVEN E. VALDEHUEZA, MBA Lourdes College Instructor
HOUSEHOLDS INTERMEDIATE GOOD FIRM RAW MATERIAL FIRM MONEY PAYMENT FOR PURCHASE OF FINAL GOODS RESOURCES MONEY PAYMENT FOR RESOURCES RESOURCES MONEY PAYMENT FOR RESOURCES RESOURCES MONEY PAYMENT FOR RERESOURCES FINAL GOODS FINAL GOOD FIRM
The Circular Flow of Income PURCHASES OF GOODS AND SERVICES INCOME FLOW OF WAGES, INTERESTS, RENTS HOUSEHOLDS PRODUCING UNITS
Circular Flow of Income Among Production Units FINAL GOOD FIRM RAW MATERIALS FIRM MONEY PAYMENTS FOR INTERMEDIATE GOODS MONEY PAYMENTS FOR RAW MATERIALS INTERMEDIATE GOOD FIRM HOUSEHOLDS MONEY PAYMENTS FOR FINAL GOODS
Goods and Services Factors of Production (land, labor, capital, entrepreneur) Payments of Factors (rent, wages, interest, profit) Payment of Purchase of goods and services. Household Sector Business Sector
The Circular Flow of Goods & Income of Households & Firms with the Government & Foreign Countries GOVERNMENT HOUSEHOLDS PRODUCING UNITS FOREIGN COUNTRIES Income Payments of Wages, Rent, Dividends, & Interests Purchase of Goods & Services Economic Resources Taxes Taxes Wages, Transfer Payments Purchase of Goods & Services Goods & Services Money Payments for Imports Money Payments for Exports
Implications of the Circular Flow of Economic Activity
The goods, resources, and money payments will flow as long as households continue to consume, and as long as firms continue to produce.
That since goods and resources flow in exchange for payments, the rate of payments flow will in the end be the same. Money is the inducing factor, and the pillar of the price system. Without it, there is no price system.
Outflows (factors that decrease the level of economic activity)
Inflows (factors that increase the level of economic activity)
The Circular Flow of Economic Activity Reflecting The Outflows & The Inflows HOUSEHOLDS PRODUCING UNITS Income Payments of Wages, Rent, Dividends, & Interests Purchase of Goods & Services Economic Resources Goods & Services IMPORTS TAXES SAVINGS EXPORTS EXPENDITURES INVESTMENTS Foreign Countries Government Banks
Outflows are difficult to control because they are dependent on income. When income increases, we expect savings, taxes, and imports to increase.
Inflows are easier to manipulate. The proper use of policy enables the government to encourage exports and investments and to increase its expenditures when it desires to expand the flow of economic activity.