Michele Jaymalin-Dulay, PHD: College of Education 1 Sem 2020-2021
Michele Jaymalin-Dulay, PHD: College of Education 1 Sem 2020-2021
Michele Jaymalin-Dulay, PHD: College of Education 1 Sem 2020-2021
Chapter 02
1. Production 2. Income
3. Expenditure
Involvement of Different Sectors in Circular Flow
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)
Producers/ Firms 1
Households
Factor Services (Real Flow)
2
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
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
Payment
Import
Taxes
Payments
Transfer
Saving
Saving
Producers Households
Borrowing Money / Finance Borrowing
Transfer Payments
Taxes
Leakages in the Circular Flow
Flow Variables which have negative impact on 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