CHAPTER 3

THE ECONOMIC MODELS

AND THE CIRCULAR FLOW OF PRODUCTION
 THE CIRCULAR FLOW OF ECONOMIC ACTIVITIES

Lesson 1 The Economic System

Lesson 2 The Circular Flow of Economic Activities
Lesson 3 Outflows and Inflows of the Circular Flow
 THE CIRCULAR FLOW OF ECONOMIC ACTIVITIES

The Circular Flow Diagram

Flow a quantity
FIGURE 5.3measured
The over a particular period of time.
Circular Flow of
Income it flows
Payments from employer to employees, or from buyers
of goods or services to sellers or producers.
Stock a quantity measured at a given point in time. For
example, wealth and savings deposit.
Circular Flow This a movement of economic activities that is
taking place in the economic system.

Market a place where buyers and sellers interact together and

are eventually engaged in exchange.
KYOSAKIS CASH FLOW QUADRANT

E B
EMPLOYEE BUSINESS OWNER
YOU HAVE A JOB. YOU OWN A SYSTEM.
PEOPLE WORK FOR YOU.

S I
SELF-EMPLOYED INVESTOR
YOU OWN A JOB. YOUR MONEY WORKS FOR YOU.

ACTIVE INCOME PASSIVE INCOME

AMOUNT OF ACTIVE WORK INCOME DOES NOT DEPEND
DETERMINES INCOME ON ACTIVE WORK

TO BUILD WEALTH SHIFT FROM LEFT TO RIGHT.

INCOME VS. EFFORT

ACTIVE INCOME
WORK HARD FOR THE MONEY

INCOME FROM YOUR DIRECT LABOR.

Job Salary
Doctor Patient
Lawyer Client
OFW/ Seafarer Contract
Agent Commission
Contractor - Project
YOU STOP WORKING, YOUR INCOME ALSO STOPS.
SCARY IF YOU JUST DEPEND ON ACTIVE INCOME (WHICH
CANNOT MAKE YOU RICH TEMPORARY INCOME).
INCOME VS. EFFORT

MONEY WORK HARD FOR YOU

INVESTMENT INCOME. RENTAL INCOME.
Stocks / Equity Land
Bonds Buildings
Unit Investment Trust Fund Equipments, ETC.
Variable Unit Link (VUL)
MUTUAL FUNDS

DIVIDEND INCOME. ROYALTY INCOME.

Shares of Stocks in a Copyright, Trademark, Patent
Company Franchising Business
You may make good money because of your degree, position,
title, talent or skill, but its all worthless if you fail to create
passive income.
INVESTMENT and ASSET

INVESTMENT
An asset that generates
income or appreciates in
value in the future.

ASSET
Something of economic or
financial value that an
individual buys, owns or
controls with the expectation
that it will provide him
economic or financial
benefits.
FINANCIAL AND REAL ASSETS

FINANCIAL ASSETS represent a financial

claim on an asset that is usually documented
by some form of legal representation.

REAL ASSETS represent an actual

tangible asset that may be seen, felt,
held, or collected.
FINANCIAL AND REAL ASSETS
WHAT IS A MUTUAL FUND?

MUTUAL FUND is an investment company that pools money

from many investors and through its fund managers invests the
money in securities, which investments generate return that
will pass back to the investors.
HOW MUTUAL FUND WORKS

OWNERSHIP NO. OF SHARES LONG TERM

WOULD YOU LIKE TO BE PARTNERS WITH THESE COMPANIES?

ALLOWS YOU TO EARN WHAT THESE COMPANIES ARE EARNING

 THE CIRCULAR FLOW OF ECONOMIC ACTIVITIES

The Circular Flow Diagram

EconomicFIGURE 5.3 The refer to the factors of production or

Resources
inputs Circular
to Flow of
production
Payments
land, labor, capital entrepreneur and
foreign exchange.
Basic Needs are the needs of man required for his survival like
food, clothing and shelter.
Goods anything that yields satisfaction to someone. It may
either be tangible, when it is in the form of material goods or
commodities, or intangible when it is in the form of services.
 THE CIRCULAR FLOW OF ECONOMIC ACTIVITIES

The Circular Flow Diagram

In the circular flow of economic
FIGURE
activities, goods and5.3services
The
Circular Flow of
flow clockwise: Labor services
Payments
supplied by households flow to
firms, and goods and services
produced by firms flow to
households.
Payment (usually money) flows
in the opposite
(counterclockwise) direction:
Payment for goods and services
flows from households to firms,
and payment for labor services
flows from firms to households.
 THE CIRCULAR FLOW OF ECONOMIC ACTIVITIES

The Circular Flow Diagram

Households receive income from firms and
the government, FIGURE
purchase 5.3 The and
goods
Circular
services from firms, andFlow of to the
pay taxes
government. They also purchase foreign-
Payments
made goods and services (imports). Firms
receive payments from households and the
government for goods and services; they
pay wages, dividends, interest, and rents to
households and taxes to the government.
The government receives taxes from firms
and households, pays firms and households
for goods and servicesincluding wages to
government workersand pays interest
and transfers to households. Finally, people
in other countries purchase goods and
services produced domestically (exports).
Note: Although not shown in this diagram,
firms and governments also purchase
imports.
 THE CIRCULAR FLOW OF ECONOMIC ACTIVITIES

Government Purchases (G), Net Taxes (T), and Disposable Income (Yd)

Adding Net Taxes (T) and

Government Purchases (G) to
the Circular Flow of Income