Circular flow of economic activity 2 sector model. 2 2022-10-08
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Self-reflection is a valuable exercise that can help individuals understand and grow in their personal and professional lives. It involves taking a step back and considering one's thoughts, behaviors, and actions, and examining how they have impacted oneself and others. Engaging in self-reflection can lead to increased self-awareness, personal growth, and the ability to make positive changes in one's life.
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Introduction: This section should provide an overview of the purpose of the paper and what the reader can expect to learn from it.
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Circular Flow of Income: 2 Sector, 3 Sector and 4 Sector Economy
On the other hand, the business sector makes payments to the foreign sector for imports о capital goods, machinery, raw materials, consumer goods, and services from abroad. Circular flow of economic activity: Four sector Model — Opened Economy Export is the inflow of money into a circular flow. For this, we add taxes and government purchases or expenditure in our presentation. If exports are equal to the imports, then there exists a balance of trade. Money Income Flows in the Four Sector Open Economy: Adding Foreign Sector: We now turn to explain the money flows that are generated in an open economy, that is, economy which have trade relations with foreign countries. The Circular Flow in a Four-Sector Economy : So far the circular flow has been shown in the case of a closed economy.
The business sector imports capital goods, machinery, raw materials and consumer goods and pays for services received from foreign countries. They are actively engaged in three economic activities of production, consumption and exchange of goods and services. In fact we have explained above the flow of money that occurs in the functioning of a closed economy with no savings and no role of government. The business sector produces goods and services by purchasing production factors from the household sector. Cite this article as: Palistha Maharjan, "Circular Flow of Income and Expenditure -Two Sector Economy," in Businesstopia, January 6, 2018, The circular flow model in the two-sector economy is a hypothetical concept which states that there are only two sectors in the economy, household sector and business sector business firms. Imports must be subtracted from the total expenditure on foreign produced goods and services to get the value of net exports.
Government: The government plays a key role in all types of economic systems—capitalist, socialist and mixed. Technically, employees can more accurately be thought of as being rented rather than being sold, but this is usually an unnecessary distinction. Example We can take the example of a Nutella factory to explain the circular flow of income. The above example is simplistic. Consumers and firms have a dual role, and exchange with one another in two distinct ways: 1 Consumers or households own all the factors of production, that is, land, labour, capital and entrepreneurship, which are also called productive resources. In the lower part of the figure, money flows from households to firms as consumption expenditure made by the households on the goods and services produced by the firms, while the flow of goods and services is in opposite direction from business firms to households. These add to the money flows which are shown in Fig.
As a result, foreigners will acquire domestic financial assets. This is so because the flow of money is a measure of national income and will, therefore, change with changes in the national income. Furthermore, the circular flow of income caters to the need to include complexities of income and expenditure. Consequently, governmental interference affects the overall economic performance of a country. In a simple economy which has neither government, nor foreign trade, the value of output produced which we denote by Y is equal to the value of output sold. These are the actual flows of goods and services from businesses to consumers, which are connected to productive resources from consumers to businesses through trade or exchange. Since national income which is equal to GNP can be either consumed or saved,.
On the contrary, if investment expenditure is greater than savings, rate of interest will rise so that at a higher rate of interest savings increase and become equal to planned investment expenditure. Transfer payments are treated as negative tax payments. Saving a part of income means it is not spent on consumer goods and services. It shows the trade between the economy and the rest of the world. Examples of imported goods are essential food items, foreign labour, car spare parts and capital goods.
Thus inflows injections equal outflows leakages in the circular flow. Also, foreign trade is excluded as this is a closed economic model. Next take the circular flow between the business sector and the government sector. Government affects the economy in a number of ways. All types of taxes paid by the business sector to the government are leakages from the circular flow. In our analysis, we assume it is only the business firms of the domestic economy that interact with foreign countries and therefore export and import goods and services.
Four Sector Circular Flow Model The interchanges between the household, business firm, and government sectors remain the same if a foreign sector is added to the model. The fact that the arrows on the money lines and the arrows on the product lines go in opposite directions simply represents the fact that market participants always exchange money for other stuff. Total expenditure flow in the economy is now the sum of consumption expenditure denoted by C , investment expenditure I and Government expenditure denoted by G. Also in terms of business sector and foreign sector, the business sector exports goods to foreign countries. So, the government pays back in terms of incentives and purchases goods from the firms. In free market economies there exists a set of institutions such as banks, insurance companies, financial houses, stock markets where households deposit their savings.
These days financial markets around the world have become well integrated. If savings exceed investment expenditure, rate of interest falls so that, at a lower rate of interest, investment increases and both become equal. We will now explain if households save a part of their income, how their savings will affect money flows in the economy. These models are a three-sector model of economy and a four-sector model of the economy. In a mixed economy, the government strengthens the market system. Taxes, as previously said, are a leak from the circular flow.
If government purchase exceeds net taxes then the government will incur a deficit equal to the difference between the two, i. In other words, investment is injection of some money in circular flow of income. Circular Income Flow with Saving and Investment : In our above analysis of the circular flow of income we have assumed that all income which the households receive, they spend it on consumer goods and services. These government expenditures are injections into the circular flow. .
