circular flow of economy in four sector economy with diagram
Answers
Answer:
Household Sector:
Households provide factor services to firms, government and foreign sector.
In return, it receives factor payments. Households also receive transfer payments from the government and the foreign sector.
Households spend their income on:
(i) Payment for goods and services purchased from firms;
(ii) Tax payments to government;
(iii) Payments for imports.
Firms:
Firms receive revenue from households, government and the foreign sector for sale of their goods and services. Firms also receive subsidies from the government.
Firm makes payments for
(i) Factor services to households;
(ii) Taxes to the government;
(iii) Imports to the foreign sector.
Government:
Government receives revenue from firms, households and the foreign sector for sale of goods and services, taxes, fees, etc. Government makes factor payments to households and also spends money on transfer payments and subsidies.
Foreign Sector:
Foreign sector receives revenue from firms, households and government for export of goods and services. It makes payments for import of goods and services from firms and the government. It also makes payment for the factor services to the households.
The savings of households, firms and the government sector get accumulated in the financial market. Financial market invests money by lending out money to households, firms and the government. The inflows of money in the financial market are equal to outflows of money. It makes the circular flow of income complete and continuous. The circular flow of income in a four-sector economy is shown in Fig. 1.7. Circular Flow of Income in a Four Sector Economy
OR
Explanation:
Four sector model studies the circular flow in an open economy which comprises of the household sector, business sector, government sector, and foreign sector. ... 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.
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The circular Cash flow of income is a two-way channel of an economy in which there is a link between money, production, and services.
EXPLANATION-
To understand the circular cash flow, we have to look for 3 sectors of the economy that is
- Industrial sector,
- The household sector,
- Government, and
- Banking sector.
The industrial sector is the sector of the society that acquires the raw materials, labor, money, and land from the society and render services, wages or salaries, interest or profit and rent for the acquire resources.
Whereas,
The household sector purchases the goods and services rendered by the industries sector and gets a salary for the amount of service they offer to the industrial sector/ business sector.
The Government is the third sector of the flow that helps to unite all the processes of the housing and industrial sector. The government is that operating body that creates a code of conduct for the proper channelizing of resources and money. To maintain a proper channel government seek different sort of taxes and fees form the household and industrial sector. Also, offers extra benefits like pension, special benefits, etc.
The banking sector deals with money creation and money channelization in the country to maintain a balance in the economy of the country. They provide money related supports and advice to all the sectors to assure the balance in the economy. They lend money in the form of loans, funds or investments as they seek interest and charge fees for the service they lend.
So, this two-way channel is completed by the process of exchange of resources in one or form to create a circular flow which starts with acquiring resources from the society to make the payments of the consumption of goods and services offered.
Conclusion-
Hence, all four sectors work interdependently to full fill the needs to complete the channel of exchange of goods and services through payments made.
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