The Circular Flow of Economic Activity

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The Circular Flow of Economic Activity

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The Circular Flow of Economic Activity

  1. 1. 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
  2. 2. Basic Economic Activities  Production • The use of economic resources in the creation of goods and services for the satisfaction of human wants.  Consumption • The using up of goods and services by consumer purchasing or in the production of other goods.  Employment • The use of economic resources in production; engagement in activity  Income Generation • The production of maximum amount an individual can spend during a period without being any worse off.
  3. 3. Two Economic Units  Household • The basic consuming unit.  Firm • The basic producing unit.
  4. 4. Stock and Flow Variables  Flow • A quantity measured over a particular period of time.  Stock • A quantity measured as of a given point in time. The concepts of stock and flow measurements are essential in understanding the economic variables of wealth and income.  Wealth • Anything of valued owned. It is a stock since it is what is owned at a particular time.  Income • The rate at which we earn money. It is a flow since income that is saved, increases the stock of wealth.
  5. 5. Economic Model of Production The Circular Flow of the Production Process ECONOMIC RESOURCES HOUSEHOLDS PRODUCING UNITS GOODS AND SERVICES
  6. 6. Circular Flow of Goods Among Production Units RAW MATERIALS RAW MATERIAL FIRM INTERMEDIATE GOOD FIRM CONSUMERS INTERMEDIATE GOODS FINAL GOODS FINAL GOOD FIRM
  7. 7. Interrelation Between Production Units & Households RAW MATERIAL FIRM RESOURCES INTERMEDIATE HOUSEHOLDS RESOURCES GOOD FIRM RESOURCES FINAL GOOD FIRM
  8. 8. Economic Model of Income and Consumption The Circular Flow of Goods and Income Among Producers & Households RESOURCES RAW MATERIAL FIRM MONEY PAYMENT FOR RERESOURCES RESOURCES MONEY PAYMENT FOR RESOURCES HOUSEHOLDS INTERMEDIATE GOOD FIRM RESOURCES MONEY PAYMENT FOR RESOURCES MONEY PAYMENT FOR PURCHASE OF FINAL GOODS FINAL GOOD FIRM FINAL GOODS
  9. 9. The Circular Flow of Income INCOME FLOW OF WAGES, INTERESTS, RENTS HOUSEHOLDS PRODUCING UNITS PURCHASES OF GOODS AND SERVICES
  10. 10. Circular Flow of Income Among Production Units MONEY PAYMENTS FOR RAW MATERIALS RAW MATERIALS INTERMEDIATE FIRM GOOD FIRM MONEY PAYMENTS FOR INTERMEDIATE GOODS FINAL GOOD FIRM MONEY PAYMENTS FOR HOUSEHOLDS FINAL GOODS
  11. 11. The Circular Flow of Output and Income Circular Flow of Physical Goods and Money Income Goods and Services Factors of Production (land, labor, capital, entrepreneur) Household Business Sector Sector Payments of Factors (rent, wages, interest, profit) Payment of Purchase of goods and services.
  12. 12. The Circular Flow of Goods & Income of Households & Firms with the Government & Foreign Countries GOVERNMENT Wages, Transfer Payments Purchase of Goods & Services Taxes Taxes Economic Resources Purchase of Goods & Services HOUSEHOLDS PRODUCING UNITS Income Payments of Wages, Rent, Dividends, & Interests Goods & Services Money Payments for Money Payments for Imports Exports FOREIGN COUNTRIES
  13. 13. 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.
  14. 14. Inflows and Outflows  Outflows (factors that decrease the level of economic activity) • Savings • Taxes • Imports  Inflows (factors that increase the level of economic activity) • Investment • Government Spending • Exports
  15. 15. The Circular Flow of Economic Activity Reflecting The Outflows & The Inflows Economic Resources Purchase of Goods & Services HOUSEHOLDS PRODUCING UNITS Income Payments of Wages, Rent, Dividends, & Interests Goods & Services IMPORTS Foreign Countries EXPORTS TAXES Government EXPENDITURES SAVINGS Banks INVESTMENTS
  16. 16. 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.
  17. 17. Three Sets of Policy  Monetary policy • Affects the savings and investment.  Fiscal policy • Controls taxes and government expenditures.  Trade policy • Affects a country’s exports and imports.
  18. 18. - THE END - Any questions? GOOD DAY!!! 

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