Circular Flow of Income by Dr. S. Malini
The circular flow of income illustrates how money moves through an economy between different sectors. In the two-sector model, the flow occurs between households and firms—households provide factors of production (like labor) and receive factor payments (wages, rent), which they spend on goods and services produced by firms, creating a continuous loop. The three-sector model adds the government, which collects taxes and provides public goods and services, influencing consumption and investment through fiscal policies. The four-sector model incorporates the foreign sector, introducing exports and imports, and reflecting an open economy where foreign trade affects national income through net exports. Together, these models help explain the interdependence and income generation across various economic units.
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Circular Flow of Income by Dr. S. Malini
- 1. Circular flow of Income Dr. S. MALINI Associate Professor and Research Supervisor Postgraduate and Research Department of Economics Ethiraj College for Women Chennai -08
- 2. 2 SECTOR MODEL The two-sector model includes households and firms: Households supply factors of production (labor, land, capital) to firms and, in return, receive wages, rent, interest, and profits. Firms produce goods and services using these factors of production and sell them to households.
- 3. 3 SECTOR MODEL The three-sector model adds the government to the two-sector framework: The government collects taxes from households and firms and injects money back into the economy through government spending on public goods and services. This model incorporates taxes (leakages) and government spending (injections), making it more realistic by accounting for public sector activities.
- 4. 4 SECTOR MODEL The four-sector model includes the foreign sector, along with households, firms, and government The Foreign Sector represents international trade, including exports and imports. Exports are injections into the economy as they bring in money from abroad, while imports are leakages as they represent spending on foreign goods and services.