6 The Circular Flow of Economic Activity

Applied Economics
CHAPTER 3
Industry and
Environmental Analysis:
Business Opportunity
Identification
LESSON 3.5
The Circular Flow of
Economic Activity
Chapter Learning Objectives
• To identify principles and tools in creating a
business
• To apply SWOT analysis as a tool in evaluating
a business opportunity
• To understand that Porter’s Five Forces of
Competitive Position Analysis can be applied as
a tool in evaluating a business opportunity
• To analyze the activities in the circular flow of
economic activity in an effort to relate the
concept to the putting up of a business
• To make a simple industry analysis
• To identify the factors which are taken into
account in an environmental analysis
• To describe the economy’s three main producing
sectors and show how important they are in
making a choice of what business to establish
• To state the importance of competitiveness and
efficiency in the economy
• To explain the value of international trade in
how one can set up a business
• To show the role tourism plays in the economy
and how it can be utilized as business
opportunity
• To identify and assess small business
opportunities
Terms to Remember in
Chapter 3
• Business • Cooperative
• Industry • Micro business
• Competition • Small scale business
• Target market • Medium scale business
• Suppliers • Large scale business
• Distributors • SWOT Analysis
• Exports • Porter’s Five Forces of
• Imports Competitive Position
• Sole proprietorship Analysis
• Partnership • The Circular Flow of
Economic Activity
• Corporation
• Physical flow
Terms to Remember in
Chapter 3
• Financial flow • Service sector
• Household • ASEAN
• Business firm • Infrastructure
• Raw materials • Liberalization Policies
• Intermediate goods • Policy
• Final goods • Productivity/Efficiency
• Industry analysis • Technology
• Environmental analysis • Tourist
• Agriculture, Fishery and • Tourism
Forestry sector
• Industrial sector
Circular Flow Defined
What is CIRCULAR FLOW?
 It is defined as the flow of activities of

household and firms in a circular direction.
The Simple Flow of Goods
and Services
What is the difference between
a PHYSICAL FLOW and a
MONEY PAYMENT FLOW?
 Physical flow is the flow of products and resources in

the economy, while money payment flow is the flow of
revenues from households to firms as payments for the
goods and/or services received by the households.
The Simple Flow of Goods
and Services
The PHYSICAL FLOW

continues in a clockwise
direction in exchange for
MONEY PAYMENT FLOW
in the counterclockwise
direction.
The Circular Flow

Production Side of the Physical Flow
What are RAW MATERIALS,
INTERMEDIATE GOODS, and
FINAL GOODS?
 Raw materials are unprocessed goods which are extracted

from their sources and do not undergo any process of
production.
 Intermediate goods are goods that have undergone some
processing but need to go through additional processing
before they can be actually used.
 Final goods are goods that are ready for direct
consumption.
Goods flow up the

production stages to the
consumers in return for
payments trickling down
the production stages in
return.
Intra-Production Payment Flow

The diagram magnifies

the flow of resources and
payments being
exchanged between
households and the
producers in the circular
flow diagram.
Resource-Production Payment Flow

The Government Sector and
the Global Economy
There are two other relevant units in the
circular flow of economic activity: the
GOVERNMENT and FOREIGN COUNTRIES.
 The government is important because it makes purchases

of economic resources from the household and makes
money payments to the resource owners for the use of their
resources.
 The government also buys goods and services from the

producing units for which it makes money payments.
The Government Sector and
the Global Economy
There are two other relevant units in the
circular flow of economic activity: the
GOVERNMENT and FOREIGN COUNTRIES.
 An economy buys goods from other countries

(imports), as well as sells goods to other countries;
(exports).
 A country pays for the goods imported and earns

income from exports.

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Applied Economics

What is CIRCULAR FLOW?

 It is defined as the flow of activities of

 Physical flow is the flow of products and resources in

The PHYSICAL FLOW

The Circular Flow

 Raw materials are unprocessed goods which are extracted

Goods flow up the

Intra-Production Payment Flow

The diagram magnifies

Resource-Production Payment Flow

 The government is important because it makes purchases

 The government also buys goods and services from the

 An economy buys goods from other countries

 A country pays for the goods imported and earns

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