Describe the circular flow of income in a 3 sector economy
Answers
business sectors with the income and product of the government sector will reach at the national income in the economy.
Household sector provides the factors of the production such as land, labour and capital and enterprise that the producers require to produce goods and services. They also receive payments as in rent, wages, interest and profits from the business sector. It is also stated that in general, household sector consists of the greatest number of consumers among all sectors and satisfying the wants will cause consume of their climate aim.
Business sector act as a part as in receiving economy resources from household sector and in exchange for consumer expenditure, they also provide household sectors goods and services. Business sector is also given money to buy scarce economic resources from the resource market. While they’re in the product market, business sector sells their products and services, which is also the way they receives their income.
To complete the circular income of income and expenditure in a three-sector closed model, the government sector is added. Taxation is a leakage from the circular flow and government purchases are injections into the circular flow.
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circular flow of income in a three sector economy consists of households, firms and the government sector. government plays a very important role in the economic development of the country. It act as both consumer and a firm as a consumer it spends on consumption of goods and services produced by firm. As a producer, it provides goods and services for the economy.
In addition to flows of circular flow in two sector economy with financial market, the introduction of govt. leads to following flows:-
1. Between households and firms-
Money flows from government to household in the form of transfer payments like scholarship, pensions, etc and factor payments for hiring factor services of households.
money flows back to the government from households in the form of direct taxes like income tax, interest tax etc.
2. between firms and government-
money flows from forms in the form of direct taxes and indirect taxes. money flows to the firms from govt. when the latter grants subsidies and makes payment to the former for purchase of goods and services produced by the firms.
A part of income earned by govt. is also saved and deposited in the financial market. Govt. also borrows money from the financial market to meet its expenditure.
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