Circular Flow in the Economy

• Foreign Sectors import/export from other countries; all sectors in the economy deal & transact business with other countries
• Subsidy is a direct or indirect payment to individuals or firms, usually in the form of cash
• Macroeconomics is the study of the whole economy; evaluates & examines the behavior & the total level of economic activity of the overall economy
• Physiocrats believed in the importance of nature in economic development
• Producers/Business Firms provide for the consumers; hire households to produce more products
• Consumers/Households are one of the important sectors in the circular flow
• Government collects taxes from business firms & households as a source of their income; responsible for providing the needs of the people
• Different sectors involved in the circular flow

  • Consumers/Households
  • Producers/Business Firms
  • Government
  • Foreign Sectors
• Equilibrium in the economy is attained when income is equal to consumption
• Relationship of Households & Business Firms


  Both sectors play an important role in the production & distribution of goods & services
• Bank can be included in the circular flow
• The Circular Flow of Goods & Services was introduced by Francois Quesnay, a French economist & leader of the Physiocrats
• Households own the factors of production; factors flow to business firms and are utilized in producing goods & services that flow to the market for finished products
• Both sectors (households & business firms) attain satisfaction by mutually providing each other’s needs; they utilize their resources to attain this
• In order to satisfy their needs, households consume the finished products
• Both sectors (households & business firms)


  Attain satisfaction by mutually providing each other’s needs; they utilize their resources to attain the things they need
• Income is the money received as payment for the produced goods & services
• The foreign market is part of our economic activities
• Households consume finished products to satisfy their needs
• Flow from Business Firms (BF)

  Initiates the money flow by giving payments to the factors of production: rent for land, wages for labor, interest for capital, profit for the entrepreneur
• When the government receives 4M pesos taxes


  It should be injected in the circular flow to balance the economy
• Government

  Provide subsidy to business firms & assume the role of a consumer & supplier of the finished products in the market
• For the household, government should give transfer payments

  In the form of pensions, scholarships, social services, & more
• To attain equilibrium in the economy, whatever income the 2 sectors receive should be spent for their consumption
• Government income

  Used for social services
• Government


  Plays both roles of consumer & supplier of the factors of production to continue the circular flow of goods & services in the economy
• Government


  Responsible for the interdependence with other countries/foreign markets to expand our trading activities
• The circular flow model depicts interactions between sectors like consumers, producers, government, and the foreign market, aiming for economic equilibrium where income matches consumption
• The government's role includes providing subsidies and managing income distribution
• Developed from Physiocrats' ideas, the model illustrates how households and businesses satisfy each other's needs
• Additionally, foreign market interactions expand trading activities