The document discusses the circular flow model in economics, which describes the continuous movement of money and resources between producers and consumers within an economy. It introduces the circular flow in a two sector and three sector economy and illustrates the flows between households, firms, and different sectors. The circular flow can be expanded to include more realistic elements like the government, financial markets, and international trade. It also describes different ways to measure the circular flow based on expenditures, income, and uses of income.

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. Types of Circular Flow
• Two Sector Economy
• Three Sector Economy
• Four Sector Economy
3-3

4. 3-4
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

5. 3-5
Figure 3.3 - The Circular Flow Diagram

6. 3-6
Circular Flow
• can be made to be more realistic by
adding
– the government
– financial markets
– international trade and finance

7. 3-7
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

8. 3-8
Different Measures of the
Circular Flow
• “uses of income” measure
– where households decide to use their
income
• saving
• taxes
• consumption

9. 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