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.