The document describes the circular flow model of the economy. It shows how money flows between households and firms through spending and income. Firms pay households for resources and labor, then households use that income to buy goods and services from firms, completing the circular flow. The model can be expanded to include the government, financial markets, and international trade and finance. Different measures of the circular flow include expenditures, income, and uses of income by households.

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
Figure 3.4 - The Circular Flow of
Economic Activity

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