Four sector model studies the circular flow in an open economy which comprises of the household sector, business sector, government sector, and foreign sector. The foreign sector has an important role in the economy. When the domestic business firms export goods and services to the foreign markets, injections are made into the circular flow model. On the other hand, when the domestic households, firms or the government imports something from the foreign sector, leakage occurs in the circular flow model.
Besides the income and expenditure of the households and business firms, government purchases or expenditures and taxation also come into play.
Here, government purchases are injections into the circular flow, while, taxation is a leakage.
Firstly, considering the flow of income and expenditure between household sector and the government, household sector pays income tax and commodity tax to the government.
On the other hand, the government also makes transfer payments to the household sector in the form of various benefits and services like pension funds, relief, sickness benefits, health, education, and other services.
The flow of income and expenditure between the business sector and the government is similar. Business firms pay taxes to the government, the government, on the other hand, provides subsidies, makes transfer payments, and pays for the goods and services it purchases from the business sector.
As stated earlier, taxes paid by the household and the business sector are the leakages from the circular flow. This decreases not only the consumption and savings of the household sector but also investments and production of the business sector decrease.
However, the government offsets the leakages by buying services from the household sector, and goods and services from the business sector. This leads to an equilibrium in the circular flow as the level of demand meets the level of supply in the economy.
A part of the income earned by the government is saved and deposited in the capital market. The government also takes loans from the capital market either to meet the current expenditure or to invest in different projects. The three sector model can be described in the following diagram: If the government spends all its income received in the form of taxes, it flows back to the household and business sector in the form of subsidies and other government expenditures.
This leads to the continuous circular flow of national income within the economy.If you are stuck with an Circular Flow of Income in a Four Sector Economy in a Four Sector Economy Homework problem and need help, we have excellent tutors who can provide you with Homework Help.
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Circular Flow of Income and Expenditure-Four Sector Economy January 6, By Palistha Maharjan The circular flow model in four sector economy provides a realistic picture of the circular flow in an economy.
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The Circular flow of income Income (Y) in an economy flows from one part to another whenever a transaction takes place. New spending (C) generates new income (Y), which generates further new spending (C), and further new income (Y), and so on.