The circular flow of income model shows how money flows between two main sectors - households and firms - in a simple economy. As households supply factors of production like labor to firms, they receive income which is then used to purchase goods and services from firms, representing the flows of real goods and money between the two sectors. The circular flow analysis forms the basis of measuring national income and shows the interdependence between economic agents as transactions continuously circulate income through the economy.

1. CIRCULARFLOWOF INCOME

2. Dollar
Income
Peso
Income (Y)
in an economy flows from one part
to another whenever a transaction
takes place.

3. Dollar
Income
Peso
Circular Flow of Income
• It is a model of the economy in
which the major exchanges are
represented as flows
of money, goods and services,
between economic agents.
• The flows of money and goods
exchanges and correspond in value.
The circular flow analysis is the
basis of national accounts.

4. Dollar
Income
Peso
Circular Flow of Income
• provides a picture of the
interconnection of the various
aspects of our economy.

5. Dollar
Income
Peso
Real Flow Money Flow
• is the exchange of goods
and services between
household and firms
• household sector supplies
raw material, land, labour,
capital and enterprise to
firms and in return firms
sector provides finished
goods and services to
household sector.
• When goods and services
flow from one sector of
the economy to another,
it is known as real flow.
• is the monetary exchange
between two sectors.
• firm sector gives
remuneration in the form
of money to household
sector a wages and
salaries, rent, interest

6. Dollar
Income
Peso
Significance of study of circular flow
of income
• Measurement of National Income
• Knowledge of Interdependence
• Unending Nature of Economic
Activities
• Injections and Leakages

7. Dollar
Income
Peso
Phases or stages of circular flow of
income
Production
Consumption
Expenditure and Generation

8. Dollar
Income
Peso
Different type of Sector

9. Dollar
Income
Peso
Simple Sector or Two Sector
Y + E + O

10. Dollar
Income
Peso
Assumptions:
• The economy consists of two
sectors: households and firms.
• Households spend all of their income (Y)
on goods and services or consumption (C).
There is no saving.
• All output (O) produced by firms is
purchased by households through
their expenditure (E).
• There is no financial sector.
• There is no government sector.
• There is no foreign sector

11. Dollar
Income
Peso
Three Sector
• Household
• Firms
• Government

12. Dollar
Income
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Four Sector
• Households
• firms
• Government
• foreign sector
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13. Dollar
Income
Peso
Leakages and Injections (Five Sector)
LEAKAGES INJECTION
Saving (S) Investment (I)
Taxes (T)
Government
Spending (G)
Imports (M) Exports (X)

14. Dollar
Income
Peso
Prepared by:
Malinao, Client William M
Saldivar, Jonabell