Chapter 2 - The Circular Flow of Economic Activity.pptx

Chapter 2 - The Circular Flow of Economic Activity

1. The Circular Flow of Economic Activity CHAPTER 2:

2. Production The use of economic resources in the creation of goods and services for the satisfaction of human wants. Employment The use of economic resources in production; engagement in activity. Consumption The use of economic resources by consumer purchasing or in the production of other goods. Basic Economic Activities

3. Household It is the basic consuming unit. Firm It is the basic producing unit. Two Economic Units

4. Flow A quantity measured over a particular period of time. Stock A quantity measured as of a given point in time. Wealth Anything of value owned. It is a stock. Income The rate at which we earn money. It is a flow. Stock and Flow Variables Both are essential in understanding the economic variables .

5. The Circular Flow of the Production Process Economic Model of Production Households Producing Units Economic Resources Goods and Services

6. Circular Flow of Goods Among Production Units Raw Materials Final Goods Intermediate Goods Raw Materials Firm Consumer Final Goods Firm Intermediate Goods Firm

7. Interrelation Between Production Units and Households Households Resources Resources Resources Raw Material Firm Intermediate Good Firm Final Good Firm

8. The Circular Flow of Goods and Income Among Producers and Households Circular Flow of Goods and Income among Producers and Households Households Resources Money Payment for Resources Resources Money Payment for Resources Resources Money Payment for Resources Money Payment for Purchase of Final Goods Final Goods Raw Material Firm Intermediate Good Firm Final Good Firm

9. The Circular Flow of Income

10. Circular Flow of Income Among Production Units Raw Materials Firm Money Payment for Raw Materials Intermediate Goods Firm Final Goods Firm Money Payment for Final Goods Households Money Payment for Intermediate Goods

11. Circular Flow of Physical Goods and Money Income The Circular Flow of Physical Goods and Money Income Economic Resources Money Payment for Purchase of Goods and Services Producing Units Money Payment for Economic Resources Goods and Services

12. The Circular Flow of Goods and Income of Households and Firms with the Government and Foreign Countries Households Foreign Countries Producing Units Government Wages, Transfer Payments Taxes Economic Resources Taxes Purchase of Goods and Services Money Payments for Imports Goods and Services Income Payments of Wages, Rent, Dividends, Interests Purchase of Goods and Services Money Payments for Exports Producing Units

13. Inflows – income that go inside the economy which expand the flow of goods and services. Investment Government Expenditures Exports Outflows – income that go outside the economy which constrict the flow of goods and services. Savings Taxes Imports Inflows and Outflows

14. The Circular Flow of Economic Activity Reflecting the Inflows and the Outflows Economic Resources Income Payments of Wages, Rent, Dividends, Interests Purchase of Goods and Services Households Producing Units Goods and Services Imports Foreign Countries Exports Investments Government Banks Expenditures Taxes Savings

15. Outflows are difficult to control because they are dependent on income. When income increases, we expect savings, taxes, and imports. Inflows are easier to manipulate. The proper use of policy enables the government to encouragement exports and investments and to increase its expenditures when it desires to expand the flow of economic activity.

16. Monetary Policy – affects savings, investments, and money supply. Fiscal Policy – control taxes and government expenditures. Trade Policy – affects a country’s imports and exports. Three Sets of Policy