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The Circular Flow of Economic Activity

The circular flow of economic activity describes the continuous flow of goods, services, and money between households and businesses. Households provide resources like labor, capital, land, and entrepreneurship to businesses, and in return receive income from businesses. Businesses then use those resources to produce goods and services, which they sell to households in exchange for the money households spent on those goods and services. This circular flow continues as long as households consume goods and services.

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39 views

The Circular Flow of Economic Activity

The circular flow of economic activity describes the continuous flow of goods, services, and money between households and businesses. Households provide resources like labor, capital, land, and entrepreneurship to businesses, and in return receive income from businesses. Businesses then use those resources to produce goods and services, which they sell to households in exchange for the money households spent on those goods and services. This circular flow continues as long as households consume goods and services.

Uploaded by

nestor
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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THE

CIRCULAR
FLOW OF
ECONOMIC
ACTIVITY
JENARY MANZANIL LO
Circular flow which is
defined as the flow of
activities of
household and firms
in a circular direction.
THE SIMPLE FLOW OF GOODS AND SERVICES

• On the other hand, households as resource owners


provide firms as producers with resource use such as
labor rendered, capital lent or invested, land rented to
producers, and entrepreneurial skills.
• The flipside to the physical flow is the
money payment flow.
• For as long as households are willing to
consume, producers continue to produce goods and
services for the households using
the resources provided by the latter.
A Closer Look
• Among the firms, there is also the
product flow up the production
stages, that is, from the raw
material to the intermediate good
and on to the final good stage for
consumption.
Raw materials are unprocessed goods like raw
minerals, logs, and wheat, which are extracted from
their sources and do not undergo any process of
production.

Intermediate goods are semi-processed goods that are


not ready for final use by the consumer, such as
leather, cloth, and steel, which have undergone some
processing but need to go through additional
processing before they can be actually used.

Final goods are goods that are ready for direct


consumption such as refrigerators, dresses, or pants.
Goods flow up the
production stages to the
consumers in return for
payments trickling down
the production stages in
return for the inter-stage
product flows.
Another form of
physical flow is the
flow of resources from
the households to the
business firms.
In return for the use of
the resources, the three
types of producing units
make money payments to
households.
THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY

There are two other relevant units in the flow: the government and
foreign countries. The government is important because it makes
purchases of economic resources from the household and makes
money payments to the resource owners for the use of their
resources. The government also buys goods and services from the
producing units for which it makes money payments.

The significance of the global economy cannot be overemphasized


in today's times. An economy buys goods from other countries;
these are called imports. An economy sells goods to other
countries; these are called exports. A country pays for the goods
imported and earns income from exports.

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