THE CIRCULAR FLOW OF ECONOMIC ACTIVITY INTRODUCTORY MACROECONOMICS

THE CIRCULAR FLOW OF ECONOMIC ACTIVITY INTRODUCTORY MACROECONOMICS By: Koibagarov Alan Dadanbekov Bakhytzhan Abdrakhman Aida Bolatova Bakhyt

Basic Economic Activities 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.

Two Economic Units Household The basic consuming unit. Firm The basic producing unit.

Stock and Flow Variables 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.

Economic Model of Production The Circular Flow of the Production Process ECONOMIC RESOURCES HOUSEHOLDS PRODUCING UNITS GOODS AND SERVICES

Circular Flow of Goods Among Production Units RAW MATERIALS INTERMEDIATE GOOD FIRM RAW MATERIAL FIRM CONSUMERS INTERMEDIATE GOODS FINAL GOOD FIRM

Interrelation Between Production Units & Households RESOURCES HOUSEHOLDS RAW MATERIAL FIRM RESOURCES INTERMEDIATE GOOD FIRM RESOURCES FINAL GOOD FIRM

Economic Model of Income and Consumption The Circular Flow of Goods and Income Among Producers & Households RESOURCES RAW MATERIAL FIRM MONEY PAYMENT FOR RERESOURCES MONEY PAYMENT FOR RESOURCES HOUSEHOLDS INTERMEDIATE GOOD FIRM RESOURCES MONEY PAYMENT FOR PURCHASE OF FINAL GOODS FINAL GOOD FIRM

The Circular Flow of Income INCOME FLOW OF WAGES, INTERESTS, RENTS HOUSEHOLDS PRODUCING UNITS PURCHASES OF GOODS AND SERVICES

Circular Flow of Income Among Production Units MONEY PAYMENTS FOR RAW MATERIALS FIRM INTERMEDIATE GOOD FIRM MONEY PAYMENTS FOR INTERMEDIATE GOODS FINAL GOOD FIRM MONEY PAYMENTS FOR FINAL GOODS HOUSEHOLDS

The Circular Flow of Output and Income Circular Flow of Physical Goods and Money Income Goods and Services Factors of Production (land, labor, capital, entrepreneur) 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 Purchase of Goods & Services Taxes Economic Resources Purchase of Goods & Services HOUSEHOLDS PRODUCING UNITS Income Payments of Wages, Rent, Dividends, & Interests Goods & Services Money Payments for Imports Money Payments for Exports FOREIGN COUNTRIES

Implications of the Circular Flow of Economic Activity 1. The goods, resources, and money payments will flow as long as households continue to consume, and as long as firms continue to produce. 2. 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.

Inflows and Outflows (factors that decrease the level of economic activity) Savings Taxes Imports Inflows (factors that increase the level of economic activity) Investment Government Spending Exports

The Circular Flow of Economic Activity Reflecting The Outflows & The Inflows Economic Resources HOUSEHOLDS Purchase of Goods & Services PRODUCING UNITS Income Payments of Wages, Rent, Dividends, & Interests Goods & Services IMPORTS Foreign Countries EXPORTS TAXES Government EXPENDITURES SAVINGS Banks INVESTMENTS

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.

Three Sets of Policy Monetary policy Affects the savings and investment. Fiscal policy Controls taxes and government expenditures. Trade policy Affects a country’s exports and imports.

- THE END Any questions? GOOD DAY!!!