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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


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