Skip to main content

Circular Flow of Income in Four Sector Economy

3.   The Four-Sector Economy:


The circular flow model in four sector economy provides a realistic picture of the circular flow in an economy. The four sector economy comprises of:
a)    Household
b)    Firms
c)    Government
d)    Foreign Sector
Here, there are two important components:
a.    Export:  Export is referring to as an injection into the circular flow that consists of payment receives for goods and services sold to the rest of the world.

      b.    Import:  Import is referred to as a leakage from the circular flow that consists of        payments made for goods and services purchased from the rest of the world.

When firms exports goods and services to the foreign markets, injections are made into the model. On the other hand, when household, firm or government imports any goods and services from foreign sector, leakage occur in the model.
In this model, each sector has dual roles to play in the economy; while one sector receives certain payments from other sectors, it pays back to those sectors as well. Circular flow of income in different sector can be explained as follows:
  
Household Sector
a.    Receipts:

1.    Factor income from business sector
2.    Transfer payments from government sector

b.    Payments:
1.    To the business sector in the form of consumption expenditure
2.    To the government in the form of taxes
3.    To the capital market in the form of saving



Business Sector
a.    Receipts:
1.   Income from selling goods and services
2.   Income from exports
3.   Subsidies from government
4.   Borrowing from capital market

b.    Payments:
1.    Factor payments
2.    Import payments
3.    savings

Government Sector
a.    Receipts:
1.    Taxes paid by household and business sector
2.    Interest and dividends from investment

b.    Payments:
1.    Business sector for purchasing goods and services
2.    Transfer payments to household
3.    Surplus to capital market

Foreign Sector
a.    Receipts:
1.    Income from business sector

b.    Payments:
1. To business sector from where import has been made


Labels:

Comments

Post a Comment

Popular posts from this blog

Circular Flow of Income in Three Sector Economy

2.     The Three-Sector Economy : In the circular flow model of three sector economy, government intervention has also been accounted for. But it is still assumed to be a closed economy, where the income flow is not influenced by any foreign sector. IN three-sector economy there are three parties: a)     Household b)     Firms c)     Government   Here, there are two important components: a.     Injection:   Injections are types of expenditure on goods and services that have any origin other than the household consumption. There are two types of injections: The first one is called government purchases. This includes all purchases of goods made by all levels of government employees. Government purchases do not transfer payments like social security, disability payments or unemployment compensation. The sum of government purchases and transfer payments is c...
1 comment
Read more

Circular Flow of Income in Two Sector Economy

The circular flow of income is the model of the economy in which the major exchanges are represented as flows of money, goods and services etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow of income can be described in three types of economies. They are: 1.     The Two-Sector Economy 2.     The Three-Sector Economy 3.     The Four-Sector Economy (Open Economy) 1.    The Two-Sector Economy: This economy considers a simple prototype economy which does not have a government and does not trade with other countries. The only transactions in this economy are: a)     Households b)     Firms Functions of Household : i.               Factors of production ii.      ...
1 comment
Read more