CHAPTER 2: The Circular Flow of Economic Activity Measurements in understanding the economic
variables of wealth and income
PRODUCTION WEALTH the use of economic resources in the creation of goods and Anything of valued owned services for the satisfaction of human wants. Consist of money, jewelry, buildings and other property. transforming inputs into an output It a stock since it is what is owned at particular time. EMPLOYMENT INCOME the use of economic in production Is a flow it contributes to economic growth: The rate which we earn money Workers produce valuable goods and services, and It is very important to the stock of wealth that we can build. in turn receive a wage which they can spend on buying the goods produced. ECONOMIC MODEL OF PRODUCTION CONSUMPTION the use of economic resources the process of buying/using goods and services RENT payment for the use of land type of payment which is made to the owner of the land for the use of land WAGES payment for the use of labor the price for the services of the labor – physical or manual work INTEREST payment for the use of capital or money the price paid for borrowed funds or the cost of money
THE CIRCULAR FLOW OF ECONOMIC ACTIVITY
Circular Flow Model
▪ Within the economy, basic economic activities take place. These include production, consumption, employment, and income generation. They take place through the interrelationship that is existing between two economic units: the household which is the basic consuming units; and the firm which is the basic producing unit. • Whenever resources are used in production, a price is paid to the resource owners. • The land-owner earns rent, the capitalist, interest, and labor his wages. • When the goods and services produce are ready for use, this leads to another economic activity called consumption. These activities make up the circular flow of economic activity
STOCK AND FLOW VARIABLES
FLOW - a quantity measured over a particular period of time. EXAMPLE: • Income • National Income for the year 2022-2023 STOCK - a quantity measured as of a given point in time. EXAMPLE: • Wealth • National Wealth as on 31 March 2023
THE CONCEPT OF STOCK AND FLOW
ECONOMIC MODEL OF INCOME AND CONSUMPTION The flow of physical goods is normally accompanied by a flow of income. The circular flow of income of wages, rents, and interests earned. This income is now the source of funds of households, needed for them to buy goods and services in consumption.
THE CIRCULAR FLOW OF OUTPUT AND INCOME
The two flows of output and income are equal. EXPORTS selling goods and services to other countries. IMPORTS purchasing goods and services from other countries.