CIRCULAR FLOW OF INCOME IN THE ECONOMY

Group 6

Geneveive Pareño

Mary Joy Relox

Christian Relox

Reynabelle Monacillo

Mea T. Baquilar
 Introduction:

An economy is a complex system of interconnected production, consumption,

and exchange activities that determine how resources are distributed among all
participants. The production, consumption, and distribution of goods and services work
together to meet the needs of people living and working in an economy. The economy
can be thought of as two cycles that move in opposite directions. The field of economics
can be divided into two main areas of focus: microeconomics and macroeconomics.
The circular flow model is a fundamental economic concept that describes the flow of
goods, services, and resources between households and businesses. This circulation of
money is an important concept in economics that expresses the interdependence of
economic agents and their transactions. In the case of the Philippines, increasing
circularity is critical to achieving sustainable economic development and reducing
income inequality. This policy paper focuses on resource markets between firms and
households, highlighting their importance and suggesting possible policy measures to
increase their efficiency and sustainability. The problem to be solved is to understand
the factors that influence the supply and demand of resources in this market and how
this affects resource allocation, income distribution, and economic growth. How do
businesses and households interact in resource markets? How does resource allocation
in resource markets affect economic growth? What factors affect the distribution of
income between households and businesses? Answering these questions provides a
deeper understanding of resource markets in a circular model. This helps economists
and policymakers develop strategies to improve resource allocation, promote fair
income distribution, and promote sustainable economic growth. Absolutely! The
objectives of the circular model, which represents the market for resources between
businesses and households, are:

1. Understand the flow of resources between businesses and households.

2. Analysis of factors affecting resource markets.

 3. Consider how companies decide the quantity and quality of resources needed
to produce goods and services.

By achieving these goals, the circular model provides a framework for

understanding the dynamics of resource markets between firms and households.
Circular flow models emphasize the "flows" within an economy: the flows of economic
resources, goods, services, and money.

Background:

The circular flow model is based on the basic idea that households are the main
suppliers of resources such as labor, land, and capital, and businesses are the main
consumers of these resources to produce goods and services. based on assumptions.
In this cycle model, households earn income by providing resources to businesses. This
income is used by households to purchase goods and services produced by
businesses. This creates a continuous flow of money and resources into the economy,
creating a circular pattern. Imagine you are a hungry consumer and you hear
homemade fries calling your name at a restaurant down the street. Go to a restaurant
with money and enjoy a delicious meal. When you pay a check, you are purchasing
goods or services. But the money doesn't stay in the cash register for long. Alice, the
owner of her restaurant, uses the money to purchase resources. She buys her
homegrown potatoes from her farmer. She pays the waiter who takes the order. She will
repay the loan she received to purchase new equipment for the restaurant. These are
all production costs. After she pays her production costs, the revenue that remains is
her profit, her income as an entrepreneur who owns and operates a restaurant.
Suppose your money goes to the farmer and it becomes their income. However, this
money will not remain in his wallet forever. Before you know it, he'll spend it and the
cycle will start all over again. A circular flow model shows the interaction between her
two groups of economic decision makers (households and businesses) and her two
types of economic markets (resource markets and goods and services markets).
Households are displayed on one side of the model. A household consists of one or
more of her persons (such as a family member) living in the same residential unit.
Households own all economic resources in the economy. Economic resources are land,
labor, capital, and entrepreneurship. Land resources are natural resources. For
example, this could be the actual land owned by the farmer, or other natural resources
such as oil, water, or wood. A job is literally a job where you get paid. Capital resources
are goods that are used to produce other goods and services. For example, consider a
hammer used by a carpenter or a computer used in a business. Finally,
entrepreneurship refers to people who combine other resources to create new products
and services and bring them to market. At the top of the model is the market for
resources. Households therefore receive wages for their labor, rents for the use of land,
interest for the use of capital, and profits for their entrepreneurial skills. Resource
markets are where households sell and businesses buy economic resources such as
land, labor, capital, and entrepreneurial skills. Note that households have all the
economic resources. In other words, in a resource market, households sell resources
and companies buy resources. Resources flow in one direction (counterclockwise) and
money flows in the other (clockwise). Businesses are sellers of goods and services in
the market. Businesses sell goods and services for money. In this case, we call it
revenue. Companies are buyers in resource markets. Businesses buy land, labor, and
capital as market resources, exchanging market revenues for goods and services. The
money spent in this case is called production cost. This model shows the flow of money
that occurs in exchange for goods, services, and resources. Money flows clockwise, but
goods, services, and resources flow counterclockwise. The above process can be
summarized as follows: Consumption Expenditure –> Income –> Expenses –> Income.
The circular flow model is a simple tool for learning economics. It shows the relationship
between households and businesses and how these different decision makers work
together in the economy. Furthermore, it shows how money ensures the continuous
movement of economic resources, goods, and services within an economy. In
summary, improving monetary circulation in the Philippines is critical to achieving
economic stability and national well-being. By focusing on strengthening consumer
spending, supporting small and medium-sized enterprises, investing in infrastructure,
strengthening government spending, and promoting financial inclusion, governments
can create an environment that fosters strong circular flows. This, in turn, will contribute
to sustainable economic development, reduced income inequality, and improved living
standards for all Filipinos.

Therefore, a circular model with a complex web of economic exchanges

highlights the dynamic relationship between firms and households. In this model,
resource markets serve as the lifeblood of the economy, and the exchange of labor,
capital, and land reflects the complex dynamics of supply and demand. It emphasizes
the interdependence of these two fundamental players and weaves a web of mutual
trust and continued economic growth. It reminds us that in the great symphony of the
economy, all the sounds of businesses and homes can be heard in harmony.

REFERENCES

 https://www.studysmarter.co.uk/explanations/macroeconomics/national-
income/circular-flow-of-income/
 https://www.researchgate.net/publication/
372046841_Income_inequality_and_circular_materials_use_an_analysis_
of_European_Union_economies_and_implications_for_circular_economy_
development
 https://corporatefinanceinstitute.com/resources/economics/circular-flow-
model/
 Review of the Policy:

A key idea in macroeconomics, the circular flow of income characterizes the

constant movement of money in an economy between individuals, businesses, and the
government. The connections between these three industries and how they work
together to stimulate the economy are depicted by the circular flow model. We will give
a thorough explanation of the circular flow of revenue in this review, along with
information on its advantages, disadvantages, and components.

Korhonen, J.; Honkasalo, A.; Seppälä, J. Circular Economy: The Concept and its
Limitations. Ecol. Econ. 2018, 143, 37–46.

The circular flow of income is a fundamental concept in macroeconomics that

describes the continuous flow of money between households, firms, and the
government. The circular flow of income has several benefits, including stability,
efficiency, and equity. However, it also has some limitations, such as business cycles,
inequality, and government policies. Understanding the circular flow of income is
essential for policymakers and economists to develop effective policies that promote
economic growth, stability, and equity.

Homrich, A.S.; Galvao, G.; Abadia, L.G.; Carvalho, M.M. The circular economy umbrella: Trends
and gaps on integrating pathways. J. Clean. Prod. 2018, 175, 525–543.

Badiru, F.; Begianpuye, D.; Giwa, A.; Argungu, S.; Amen, C. Material flow analysis of electronic
wastes (e-Wastes) in Lagos, Nigeria. J. Env. Prot. 2013, 4, 1011–1017.