Circular flow of income in two three and four sector economies

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Circular flow of income in two three and four sector economies

Circular flow of Income in a Four - sector Economy

leakage equal injection equation : I t G t X = S t T tM

Y = C t I t G t X - M

For exports,country receives payment from abroad .While imports are payment made for purchase the goods and service to foreigners.So,import is a leakage.

There is now export and import

International trade sector must also included

Circular flow of Income in a Three - sector Economy

Leakage equal injection equation : I t G = S t T

tHerefore in a three sector economy,the equilibrium is: Y = C t I t G

taxes are collected by the G is a leakage as money goes out of circular flow

Purchases of goods and services as well payment of benefit or subsidies are called government expenditure (G)

Government spending will be injected into the circulat flow & the taxatioon will leak from it

There will be additional leakage and injections

It includes household sector,firms and government sector

Circular flow of Income in a Two-sector Economy

For leakage equal injection : S =I

Y = C t I

For firms,payment for productions equal with sale of goos (C) plus investment (I)

However,saving here do not go to ther firms. This represents a leakage from the circular flow

Y = C t S

Income (Y) from firms to households is equal to consumer spending (C) plus saving (S)

There is no financial sector ,government sector and foreign sector

There is no saving (S) .All output produced by firms is purchased by Households through their expenditure (C)

Households spend all of their income (Y) on goods and service or consumption (C).

The economy consist of two sectors : households and firms