THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

THECIRCULARFLOWOFECONOMICACTIVITYINTRODUCTORYMACROECONOMICSBy:CristobalM.PagosoRosemaryP.DinioGeorgeA.VillasisPreparedby:GREGARDONAVENE.VALDEHUEZA,MBALourdesCollegeInstructorBasicEconomicActivitiesProduction•Theuseofeconomicresourcesinthecreationofgoodsandservicesforthesatisfactionofhumanwants.Consumption•Theusingupofgoodsandservicesbyconsumerpurchasingorintheproductionofothergoods.Employment•Theuseofeconomicresourcesinproduction;engagementinactivityIncomeGeneration•Theproductionofmaximumamountanindividualcanspendduringaperiodwithoutbeinganyworseoff.TwoEconomicUnitsHousehold•Thebasicconsumingunit.Firm•Thebasicproducingunit.StockandFlowVariablesFlow•Aquantitymeasuredoveraparticularperiodoftime.Stock•Aquantitymeasuredasofagivenpointintime.Theconceptsofstockandflowmeasurementsareessentialinunderstandingtheeconomicvariablesofwealthandincome.Wealth•Anythingofvaluedowned.Itisastocksinceitiswhatisownedataparticulartime.Income•Therateatwhichweearnmoney.Itisaflowsinceincomethatissaved,increasesthestockofwealth.EconomicModelofProductionTheCircularFlowoftheProductionProcessHOUSEHOLDSECONOMICRESOURCESGOODSANDSERVICESPRODUCINGUNITSCircularFlowofGoodsAmongProductionUnitsRAWMATERIALFIRMCONSUMERSINTERMEDIATEGOODFIRMRAWMATERIALSFINALGOODSINTERMEDIATEGOODSFINALGOODFIRMInterrelationBetweenProductionUnits&HouseholdsHOUSEHOLDSRESOURCESRESOURCESRESOURCESFINALGOODFIRMINTERMEDIATEGOODFIRMRAWMATERIALFIRMEconomicModelofIncomeandConsumptionTheCircularFlowofGoodsandIncomeAmongProducers&HouseholdsHOUSEHOLDSINTERMEDIATEGOODFIRMRAWMATERIALFIRMMONEYPAYMENTFORPURCHASEOFFINALGOODSRESOURCESMONEYPAYMENTFORRESOURCESRESOURCESMONEYPAYMENTFORRESOURCESRESOURCESMONEYPAYMENTFORRERESOURCESFINALGOODSFINALGOODFIRMTheCircularFlowofIncomePURCHASESOFGOODSANDSERVICESINCOMEFLOWOFWAGES,INTERESTS,RENTSHOUSEHOLDSPRODUCINGUNITSCircularFlowofIncomeAmongProductionUnitsFINALGOODFIRMRAWMATERIALSFIRMMONEYPAYMENTSFORINTERMEDIATEGOODSMONEYPAYMENTSFORRAWMATERIALSINTERMEDIATEGOODFIRMHOUSEHOLDSMONEYPAYMENTSFORFINALGOODSTheCircularFlowofOutputandIncomeCircularFlowofPhysicalGoodsandMoneyIncomeGoodsandServicesFactorsofProduction(land,labor,capital,entrepreneur)PaymentsofFactors(rent,wages,interest,profit)PaymentofPurchaseofgoodsandservices.HouseholdSectorBusinessSectorTheCircularFlowofGoods&IncomeofHouseholds&FirmswiththeGovernment&ForeignCountriesGOVERNMENTHOUSEHOLDSPRODUCINGUNITSFOREIGNCOUNTRIESIncomePaymentsofWages,Rent,Dividends,&InterestsPurchaseofGoods&ServicesEconomicResourcesTaxesTaxesWages,TransferPaymentsPurchaseofGoods&ServicesGoods&ServicesMoneyPaymentsforImportsMoneyPaymentsforExportsImplicationsoftheCircularFlowofEconomicActivity1.Thegoods,resources,andmoneypaymentswillflowaslongashouseholdscontinuetoconsume,andaslongasfirmscontinuetoproduce.2.Thatsincegoodsandresourcesflowinexchangeforpayments,therateofpaymentsflowwillintheendbethesame.Moneyistheinducingfactor,andthepillarofthepricesystem.Withoutit,thereisnopricesystem.InflowsandOutflowsOutflows(factorsthatdecreasethelevelofeconomicactivity)•Savings•Taxes•ImportsInflows(factorsthatincreasethelevelofeconomicactivity)•Investment•GovernmentSpending•ExportsTheCircularFlowofEconomicActivityReflectingTheOutflows&TheInflowsHOUSEHOLDSPRODUCINGUNITSIncomePaymentsofWages,Rent,Dividends,&InterestsPurchaseofGoods&ServicesEconomicResourcesGoods&ServicesIMPORTSTAXESSAVINGSEXPORTSEXPENDITURESINVESTMENTSForeignCountriesGovernmentBanksOutflowsaredifficulttocontrolbecausetheyaredependentonincome.Whenincomeincreases,weexpectsavings,taxes,andimportstoincrease.Inflowsareeasiertomanipulate.Theproperuseofpolicyenablesthegovernmenttoencourageexportsandinvestmentsandtoincreaseitsexpenditureswhenitdesirestoexpandtheflowofeconomicactivity.ThreeSetsofPolicyMonetarypolicy•Affectsthesavingsandinvestment.Fiscalpolicy•Controlstaxesandgovernmentexpenditures.Tradepolicy•Affectsacountry’sexportsandimports.-THEEND-Anyquestions?GOODDAY!!!