CIRCULAR FLOW OF NATIONAL INCOME

The circular flow of income shows connections between different sectors of our economic system.

for example wages and salaries going to people in work.

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DETERMINANTS

FOREIGN SECTOR

FIRMS/ BUSINESS

FINANCIAL INSTITUTION

HOUSE HOLD

GOVERNMENT

HOUSEHOLD:

A group of people that share their income.

Different factors of production.

Household also work as consumers

FIRMS

Firms:

An organization that produces

goods and services for sale.

Maximize profit in the production

process.

GOVERNMENT

GovernmentGovernment earns revenue either from tax

or non-tax sources both from households and

firms.

FINANCIAL INSTITUTIONS

Financial institutions

Financial Institution :

consists of banks and non-bank intermediaries

who engage in the borrowing (savings

from households)and lending of money.

Foreign sector

Foreign Market:

export and import of goods and

services

inflow and outflow of capital.

TYPES OF MODELS

Two sector model

Three sector model

Four sector model

Five sector model

TWO SECTOR MODEL

Three sector model

Three sector model is created by adding the Government sector to the Two sector model

THREE SECTOR MODEL

Describe The Four sector:

This circular flow of model shows the four macro economic sectors of the economy i.e. household, business firm, government, and financial institutions.

FOUR SECTOR MODEL

FIVE SECTOR MODEL

Describe The five Sector

In five sector circular flow of income model, the state of equilibrium

occurs when the total leakages are equal to the total injections that

occur in the economy.

This can be shown as:

Savings + Taxes + Imports = Investment + Government Spending +

Exports

S + T + M = I + G + X.