Lesson 2: Circular Flow - Macroeconomics PDF

MIRIAM COLLEGE HIGH SCHOOL S.Y. 2024 - 2025 LESSON 2: CIRCULAR FLOW MACROECONOMICS SOCIAL STUDIES 9 INTRODUCTION In this unit, you will now sum up all the behavior of the actors of the economy and attempt to understand how they move by looking at it from a macro perspective. Hen...

MIRIAM COLLEGE HIGH SCHOOL S.Y. 2024 - 2025 LESSON 2: CIRCULAR FLOW MACROECONOMICS SOCIAL STUDIES 9 INTRODUCTION In this unit, you will now sum up all the behavior of the actors of the economy and attempt to understand how they move by looking at it from a macro perspective. Hence, in this lesson, you will learn about the different models of the circular flow to be able to analyze how the different actors play their part in the economy. These actors come from the household, firms, government, and other sectors. Lastly, you will have a closer look at how the economies work through the different models of the circular flow to contribute to the national income and output. PAGE 2 WHAT IS MACROECONOMICS? Macroeconomics refers to the study of the overall performance of the economy. While microeconomics studies how individual people make decisions, macroeconomics deals with the overall aggregate effect of microeconomics. Macroeconomics is crucial for the government to understand and predict the long-term consequences of their decisions. The overarching goals of macroeconomics are to maximize the standard of living and achieve stable economic growth. The goals are supported by objectives such as minimizing unemployment, increasing productivity, controlling inflation, and more. The macroeconomy of a country is affected by many forces, and as such, economic indicators are invaluable to assessing different aspects of performance. PAGE 3 THE CIRCULAR FLOW DIAGRAM PAGE 4 The economy can be thought of as two cycles moving in opposite directions. In one direction, we see goods and services flowing from individuals to businesses and back again. This represents the idea that, as laborers, we go to work to make things or provide services that people want. Cost of Production Money income (rent, wage, interest, profit) (rent, wage, interest, profit) Resource Market Mission Factors of Resources production FIRMS HOUSEHOLD Goods and services Goods and services Product Market In the opposite direction, we see money flowing from businesses to households and back again. This represents the income we generate from the work we do, which we use to pay for the things we want. Both of these cycles are necessary to make the economy work. When we buy things, we pay money for them. When we go to work, we make things in exchange for money. PAGE 4  THE CIRCULAR FLOW DIAGRAM WITH HOUSEHOLDS AND FIRMS PAGE 4 Cost of Production Money income (rent, wage, interest, profit) (rent, wage, interest, profit) Resource Market Factors of Resources production FIRMS HOUSEHOLD Mission Goods and services Goods and services Product Market A simple model considers an economy with only two sectors (households and firms) and two types of markets (resource and product market). It illustrates the circular flow of money between households and firms. For this economy, the total consumption spending by households equals the total income of households In the resource market, firms purchase factors of production owned by households like land, labor, and capital. In the product market, households use their earnings from selling factors of production to buy products from firms. Thus, money flows from firms to households, then from households in the market for factors of production. PAGE 5  THE CIRCULAR FLOW DIAGRAM WITH GOVERNMENT AND FINANCIAL SECTOR PAGE 4 GOVERNMENT Loan Cost of Production Money income (rent, wage, interest, profit) (rent, wage, interest, profit) Government Government Taxes Resource Taxes services services Market Factors of Resources production Borrowing Borrowing Savings Savings FIRMS FINANCIAL HOUSEHOLD SECTOR Goods and services Mission Goods and services Product Market In this diagram, households set aside part of their income as savings, which goes into financial markets where household savings are channeled into investment spending by firms. Investment spending by firms are spending on capital goods, such as machinery and factories. On the other hand, households and firms pay part of their income to the government in the form of taxes. Here, household income is consumed, saved, and used to pay taxes. The government uses its tax revenue to buy goods and pay for the services of government employees. Thus, household tax payment is channeled into government spending on goods and services PAGE 6  THE CIRCULAR FLOW DIAGRAM WITH THE FOREIGN SECTOR PAGE 4 FOREIGN SECTOR Export Import GOVERNMENT Savings Loan Cost of Production Money income (rent, wage, interest, profit) (rent, wage, interest, profit) Government Government Taxes Resource Taxes services services Market Factors of Resources production Borrowing Borrowing Savings Savings Mission FIRMS Goods and services FINANCIAL SECTOR Product HOUSEHOLD Goods and services Market Revenue Consumption expenditure In the previous two models, we focused only on consumption spending by households, investment spending by firms, and government spending on goods and services. In this model, we see that there are other types of spending on goods and services - imports and exports. Exports to other countries would generate a flow of money into the Philippine economy and imports lead to a flow of money out of the economy PAGE 7