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1. The Circular Flow
Course: BBA-2
Subject: BE 2
Unit:1

2. 3-2
The Circular Flow
• patterns of spending, income, and
production flowing through the
economy
– flow of purchasing power

3. 3-3
The Circular Flow
• “income side”
– firms buy the factors of production from
households
– money payments flow from firms to
households
• “expenditure side”
– households buy goods and services from
firms
– money payments flow from households to
firms

4. 3-4
Figure 3.3 - The Circular Flow Diagram

5. 3-5
Circular Flow
• can be made to be more realistic by
adding
– the government
– financial markets
– international trade and finance

6. 3-6
Different Measures of the
Circular Flow
• “expenditure side” measure
– consumption
– investment
– government purchases
– net exports
• “income side” measure
– purchases of labor, capital, and natural
resources owned directly or indirectly by
households

7. 3-7
Different Measures of the
Circular Flow
• “uses of income” measure
– where households decide to use their
income
• saving
• taxes
• consumption

8. Source
• Macroeconomics: Theory and Policy-Vanita Agarwal, Pearson
Publication
• Macro Economics-D.M. Mithani, Himalaya Publishing House, Mumbai
• Macro Economics-H.L.Ahuja, S. Chand and Company Ltd., Delhi
• Macro Economic theory-M.C.Vaish, Vikas Publishing House, Delhi
• Macro Economic Analysis-Edward Shapiro, Galyotia Publications (P)
Ltd
• Macro Economics-M.L. Seth, Lakshmi Narayan Agarwal Publishers