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Circular Flow of Eco Activity
Circular Flow of Eco Activity
INTRODUCTORY MACROECONOMICS
Production
The use of economic resources in the creation of goods and services for the satisfaction of human wants.
Consumption
The using up of goods and services by consumer purchasing or in the production of other goods.
Employment
The use of economic resources in production; engagement in activity
Income Generation
The production of maximum amount an individual can spend during a period without being any worse off.
Firm
The basic producing unit.
Flow
A quantity measured over a particular period of time.
Stock
A quantity measured as of a given point in time.
The concepts of stock and flow measurements are essential in understanding the economic variables of wealth and income.
Wealth
Anything of valued owned. It is a stock since it is what is owned at a particular time.
Income
The rate at which we earn money. It is a flow since income that is saved, increases the stock of wealth.
HOUSEHOLDS
PRODUCING UNITS
FINAL GOODS
HOUSEHOLDS
RESOURCES
RESOURCES
RESOURCES
MONEY PAYMENT FOR RESOURCES MONEY PAYMENT FOR PURCHASE OF FINAL GOODS FINAL GOODS FINAL GOOD FIRM
HOUSEHOLDS
PRODUCING UNITS
RAW MATERIALS FIRM MONEY PAYMENTS FOR INTERMEDIATE GOODS FINAL GOOD FIRM
HOUSEHOLDS
Household Sector
Business Sector
Payments of Factors (rent, wages, interest, profit) Payment of Purchase of goods and services.
The Circular Flow of Goods & Income of Households & Firms with the Government & Foreign Countries
GOVERNMENT Wages, Transfer Payments Taxes Economic Resources Purchase of Goods & Services HOUSEHOLDS Income Payments of Wages, Rent, Dividends, & Interests Goods & Services Money Payments for Imports FOREIGN COUNTRIES Money Payments for Exports PRODUCING UNITS Purchase of Goods & Services Taxes
The goods, resources, and money payments will flow as long as households continue to consume, and as long as firms continue to produce. That since goods and resources flow in exchange for payments, the rate of payments flow will in the end be the same. Money is the inducing factor, and the pillar of the price system. Without it, there is no price system.
2.
Inflows
The Circular Flow of Economic Activity Reflecting The Outflows & The Inflows
Economic Resources Purchase of Goods & Services Income Payments of Wages, Rent, Dividends, & Interests Goods & Services IMPORTS TAXES SAVINGS Foreign Countries Government Banks EXPORTS EXPENDITURES INVESTMENTS
HOUSEHOLDS
PRODUCING UNITS
Outflows are difficult to control because they are dependent on income. When income increases, we expect savings, taxes, and imports to increase. Inflows are easier to manipulate. The proper use of policy enables the government to encourage exports and investments and to increase its expenditures when it desires to expand the flow of economic activity.
policy
Fiscal
policy
Trade
policy
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