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    Circular Flow in A Two-Sector Economy

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    Gabriel Madriaga Garcia
    This document describes the circular flow model of the economy with different numbers of sectors. It begins by explaining the two-sector closed model with households and firms. It then adds the government sector to create a three-sector closed model, with taxes as outflows and government purchases as inflows. Finally, it presents the four-sector open model with saving, taxes and imports as leakages, and investment, government purchases and exports as injections, arising from households, businesses and government.

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    Circular Flow in A Two-Sector Economy

    Uploaded by

    Gabriel Madriaga Garcia
    5 views2 pages
    This document describes the circular flow model of the economy with different numbers of sectors. It begins by explaining the two-sector closed model with households and firms. It then adds the government sector to create a three-sector closed model, with taxes as outflows and government purchases as inflows. Finally, it presents the four-sector open model with saving, taxes and imports as leakages, and investment, government purchases and exports as injections, arising from households, businesses and government.

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    This document describes the circular flow model of the economy with different numbers of sectors. It begins by explaining the two-sector closed model with households and firms. It then adds the government sector to create a three-sector closed model, with taxes as outflows and government purchases as inflows. Finally, it presents the four-sector open model with saving, taxes and imports as leakages, and investment, government purchases and exports as injections, arising from households, businesses and government.

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    Download as docx, pdf, or txt
    5 views2 pages

    Circular Flow in A Two-Sector Economy

    Uploaded by

    Gabriel Madriaga Garcia
    This document describes the circular flow model of the economy with different numbers of sectors. It begins by explaining the two-sector closed model with households and firms. It then adds the government sector to create a three-sector closed model, with taxes as outflows and government purchases as inflows. Finally, it presents the four-sector open model with saving, taxes and imports as leakages, and investment, government purchases and exports as injections, arising from households, businesses and government.

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    Circular flow in a Two-sector Economy

    Consumers or households own all the factors of production, that is, land, labour, capital and
    entrepreneurship, which are also called productive resources. They sell them to firms for producing goods
    and services. The sale of goods and services by firms to consumers in the product market is shown in the
    lower portion of the inner circle from left to right; and the sale of their services to firms by households or
    consumers in the factor market is shown in the upper portion of the inner circle from right to left. These
    are the real flows of goods and services from firms to consumers which are linked with productive
    resources from consumers to firms through the medium of exchange or barter.

    Circular flow in a Three-sector Economy

    To this we add the government sector so as to make it a three-sector closed model of circular flow
    of economic activity. For this, we add taxes and government purchases (or expenditure) in our
    presentation. Taxes are outflows from the circular flow and government purchases are inflows into the
    circular flow.

    Circular flow in a Four-sector Economy

    The four sector open economy with saving, taxes and imports shown as leakages from the circular
    flow on the right hand side of figure, and investment, government purchases and exports as injections into
    the circular flow, on the left side of the figure. Further, imports, exports and transfer payments have been
    shown to arise from the three domestic sectors—the household, the business and the government.

    MACROECONOMIC SECTORS: The four aggregate sectors of the macroeconomy--household, business


    firms, government, and foreign--that reflect four key macroeconomic functions and are responsible for
    four expenditures on gross domestic product. These four sectors are the primary "actors" on the
    macroeconomic stage.
    MICROECONOMIC SECTORS: The two sectors of Microeconomics are household and business firms

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