THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

THE CIRCULAR FLOW OF ECONOMIC ACTIVITYPrepared by: Alamillo, Yves L.BSAE 2E1THE CIRCULAR FLOW OF ECONOMIC ACTIVITYStock and Flow ConceptsThe Circular Flow of Goods, Services, and IncomeThe Production ProcessThe Flow of Goods Among Producing FirmsGoods and Income Flow Among Households and Various Types of ProducersIncome Flow The Concept of EquilibriumThe Effect of Savings and InvestmentsFlow in a Market with Government and Foreign Countries2The two basic activities undertaken in any activityStock and Flow ConceptsThe Circular Flow of the Goods, Servicesand Income

The basic aspects of the economy which include production and consumption are subject to the stock and flow concepts which are circular in nature. The Production ProcessThe process of producing goods and services involves households and firms in a circular form. These firms, in turn, produce goods and services which are delivered to households for consumption.

THE CIRCULAR FLOW OF THE PRODUCTION PROCESSHOUSEHOLDS(Resource Owners)

FIRMS(Organizers and User of Economic Resources )LAND,LABOR,CAPITAL(Economic Resources)GOODS & SERVICES(Output)The Flow of Goods Among Producing FirmsThis flow involves raw materials, intermediate goods and final goods.

According to the type of goods they produce, firms may be classified as follows:Raw materials producers like those engaged in producing agricultural products used in manufacturing.Intermediate goods producers like those producing construction materials, guitar strings and food seasoning.Final goods producers like those producing chocolate bars refrigerators and bicycles.RAWMATERIALFIRMSINTERMEDIATEGOOD FIRMSFINAL GOODSFIRMSHOUSEHOLDSraw materialsintermediategoodsfinal goodsTHE FLOW OF OUTPUT BETWEEN FIRMS AND HOUSEHOLDSGoods and Income flow Among Households and Various Types of ProducersHouseholds provide producers with the economic resources required. These resources are distributed among the various types of producers. economics resourcesHOUSEHOLDS economics resources economics resources payment payment paymentINTERMEDIATEGOODSPRODUCERSFINAL GOODSPRODUCERSRAWMATERIALPRODUCERS FINAL GOODS PAYMENTIncome FlowFIRMSHOUSEHOLDSIncome Flow(wages, interest, rents)(purchase of goods and services)THE CIRCULAR FLOW OF INCOME BETWEEN HOUSEHOLDS AND FIRMSIncome flow for purchase of intermediate goods Income flow for purchase of final goodsHOUSEHOLDSFINAL GOODSFIRMSRAWMATERIALFIRMSIncome flow for purchase of intermediate goodsINTERMEDIATEGOODS FIRMSReduced IncomeFIRMSHOUSEHOLDSReduced Income(as a result ofReduced purchasesof economic resources)(as a result ofreduced purchases of goodsand services)THE EFFECT OF REDUCTION OF PURCHASESTHE CIRCULAR FLOW OF GOODS AND INCOME IN A SIMPLE ECONOMY WITH SAVINGS & INVESTMENTFIRMSHOUSEHOLDSRent, wages interest, profitLand, labor, capitalCapital goodsInvestmentspaymentsGoods and servicesSAVINGSFLOW IN THE MARKET WITH GOVERNMENT AND FOREIGN COUNTRIESIn an economy like the Philippines, there are two important sectors that interact with the households and firms: the government and foreign countries.The government sector which performs necessary functions buys economic resources of land, labour, and capital from households. The goods and services purchased by the government come in a wide variety of forms: from office supplies to transport equipment and from consultancy to janitorial services.Household purchase goods and services from other countries, like transportation equipment, books, computer programs etc.

GOVERNMENTFIRMSFOREIGNCOUNTRIESHOUSEHOLDSLand, labor,capitalpaymentfor importspayment forgoods and servicespaymentfor exportsrent,wages,interestrent,wages,interestgoods andservicespayment forgoods and services