The Circular Flows of Economic Activity.

I. Basic Circular Flow

Fig. 1

The Different Kinds of Goods

1. Goods materials or tangible things which are consumed that gives satisfaction.
2. Economic Goods are tangible things which are useful but scares.
Example: oil, gold, wood.

3. Free Goods are things which are useful but abundant.

Example: air, water, ocean, land.

4. Consumer Goods are those things which are ready for consumption and gives direct
satisfaction.
Example: houses, books, computers.
5. Producers Goods are good which are used for the production of other goods and service.
These are also known as capital goods.
Example: wood for furniture, oil for gasoline, diesel, kerosene, sugar cane for sugar,
flour for bread etc.

Classification of Goods as Necessity.

1. Luxury Goods are things which are not really needed. They give prestige and adds status
symbol. One can live even without it.
Example: Branded cars such Benz, BMW, Ferrari, branded cell phones, mansions and
resort.
2. Basic Goods are things which are really needed. One cannot live without them.
Example: Food, clothing, shelter.

3. Basic Luxury Goods it should be emphasized here that some of the luxury goods are now
being classified as basic luxury goods like the use of energy or electrical power.
II. Bilateral Transaction in Barter Economy

Fig.2

In Figure 2. The transaction is an exchange of two goods without any monetary involvement.

III. Bilateral Transaction in Money Economy

Fig. 3
IV. Multilateral Transaction in Money Economy for Consumer Goods

Fig.4

V. Multilateral Transaction in Money Economy for Producer Goods

Fig. 5
In Figure 5, the household who owns the raw materials sell them to the business firm in
return, the payment for the raw materials will be the income of the household. The household
also renders labor to the business firms in the production of the raw materials to be a finished
product. The business firms pays salary /wages for the labor to buy for the finished product.

VI. The Circular Flow of Goods & Services in a Market with Government

Fig. 6

In Figure 6, the four sectors of the society are all involved in the market economy. The
household provides service to the firms and the government and receives wage as payment for
service rendered. Household also invests in banks and other investment institutions and
receives interest income out of their investment.

They are also sources of factor of production - LAND which are being used by firms or
government for their offices pays rent to the household owner. Meanwhile, the
savings/investment sectors provide service through lending money to the firms, to the
households and even to the government. The household, firm and savings/investment
institutions all pay taxes to the government as income to be used in the provision of goods and
services to the public.
 VII. Circular Flow of Goods& Services in a Market with Government and Foreign
Countries

Fig.7

In Figure 7, the government pays salary to the laborers who render service. The government
rent building and equipment (known as capital) necessary in putting up its business
transaction. The government also pays interest to other lending institutions whenever there is
a need for additional budget for a government project to push through. The household pays
goods and services received from the business firm and the government. Any household and
firm receiving income should pay tax to the government. Foreign countries are also included
in the circular flow because some of the raw materials for the production of goods are
imported. The buying of imported products thus makes dollar outflow. The exportation of
manpower through the overseas contract workers and the selling of exported products
contribute to the dollar inflow.