Michele Jaymalin-Dulay, PHD: College of Education 1 Sem 2020-2021

Download as pdf or txt
Download as pdf or txt
You are on page 1of 21

THINKING LIKE AN ECONOMIST

Chapter 02

Michele Jaymalin-Dulay, PhD


College of Education
1st Sem 2020-2021
LEARNING OUTCOMES:

1. demonstrate comprehensive understanding on the models


used in the study of economics;
2. Interpret different circular flow of economic activities;
3. Point out the importance of the different sectors involved in the
circular flow models.
4. Appreciate the role of these sectors to economic growth.
The Circular-Flow Diagram
• The Circular-Flow Diagram: a visual model of the
economy, shows how dollars flow through markets
among households and firms
• Two types of “actors”:
• households
• firms
• Two markets:
• the market for goods and services
• the market for “factors of production”
Circular Flow of Income
• A model to understand the functioning of a macro
economic system or the economy as a whole.
• Interaction and inter-dependence between various
economic activities like production, exchange and
consumption is called the circular flow of income.
• Production give rise to Income which gives rise to
Consumption/Expenditure and expenditure gives
rise to income again.
• It goes on continuously and indefinitely in a circular
way; it has neither any beginning nor any end.
• Thus, Circular Flow of Income is defined as the flow of
payments and receipts for goods and services and factor
services between different sectors of the economy.
• Flows:
• Real Flows
• Flow of factor services
• Flow of goods and services
• Money Flows
THREE PHASES OF CIRCULAR FLOW

1. Production 2. Income

3. Expenditure
Involvement of Different Sectors in Circular Flow

1. The Producing Sector 2. The Household Sector

3. The Government Sector 4. Rest of the World Sector


Households / Resources
(Factors of Production)

LAND LABOUR

CAPITAL
ENTREPRENEUR
Factors of Production
• the resources the economy uses to produce
goods & services, including
• land
• Broadly refers to all natural resources, which are
given by, and found in nature, & are, therefore not
man made.
• Forest, mountains, rivers, oceans, minerals, air, etc..
• labor
• Any form of human effort exerted in the production
of goods and services.
• Covers a wide range of skills, abilities &
characteristics.
Factors of Production
• capital
• Is a man made goods used in the production of other
goods and services
• Buildings, machinery, and other physical facilities
used in the production process
Money is not a capital it is a form of asset that is used
as a medium of exchange.
• Entrepreneurship
• Is an economic good that commands a price referred
to as profit or loss
Circular Flow Model in 2 Sector Economy (Closed Economy)

Consumption Expenditure (Money Flow)

Goods & Services (Real Flow) 4


3

Producers/ Firms 1
Households
Factor Services (Real Flow)
2

Factor Payments (Money Flow)


The Circular-Flow Diagram

Households:
▪ Own the factors of production,
sell/rent them to firms for income
▪ Buy and consume goods & services

Firms Households

Firms:
▪ Buy/hire factors of production,
use them to produce goods
and services
▪ Sell goods & services
2 Sector Model with Savings/Financial System

Factor Payments (Money Flow)

Goods & Services (Real Flow)

Borrowing for Saving

Producers/ Firms Investment Households


Money / Finance

Factor Services (Real Flow)

Consumption Expenditure (Money Flow)


The Circular Flow Model in 3 Sector Economy
Taxes Taxes

Expenditure on Goods & Services


Transfer Payments
Subsidies Government

Borrowing
Saving
Saving Saving

Producers Households
Borrowing Borrowing
Money / Finance

Factor Payments

Consumption Expenditure
The Circular Flow Model in 4 Sector Economy (Open
Economy)
Rest of the World Saving

Borrowing

Export Receipt Government

Payment
Import

Taxes
Payments

Transfer
Saving
Saving
Producers Households
Borrowing Money / Finance Borrowing

Govt. Consumption Expenditure

Transfer Payments

Taxes
Leakages in the Circular Flow
Flow Variables which have negative impact on the
process of production in the economy.

Savings [S] Imports [M]


Taxes [T]
Injections in the Circular Flow
Flow Variables which cause expansion in the process
of production in the economy.

Investment [I]
Govt. Consumption Exports [X]
Expenditure [G]
The circular flow of income

INJECTIONS
Export
expenditure (X)
Investment (I)
Government
Consumption expenditure (G)
of domestically
Factor produced BANKS, etc GOV. ABROAD
Payments goods &
services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)

Leakages
Circularity Never Stops…
1. The discovery of
new resources

2.Innovative Technology both in the areas


of Production and Management
Significance of the Study of
Circular Flow of Income
❖Knowledge of Interdependence

❖Identification of Injections & Leakages

❖Estimation of National Income

❖Level and Structure of Economic Activity


TEST OF UNDERSTANDING

You might also like