Circular flow of income in a four-sector economy consists of households, firms, government and foreign sector. Households provide factor services to firms, government and foreign sector. In return, it receives factor payments.
Overview[ edit ] The circular flow of income is a concept for better understanding of the economy as a whole and for example the National Income and Product Accounts NIPAs.
In its most basic form it considers a simple economy consisting solely of businesses and individuals, and can be represented in a so-called "circular flow diagram. These activities are represented by the green lines in the diagram.
Businesses provide individuals with income in the form of compensation in exchange for their labor. That income is spent on the goods and services businesses produce.
These activities are represented by the blue lines in open economy circular flow essay help diagram above. The circular flow also illustrates the equality between the income earned from production and the value of goods and services produced.
An economy involves interactions between not only individuals and businesses, but also Federal, state, and local governments and residents of the rest of the world. Also not shown in this simple illustration of the economy are other aspects of economic activity such as investment in capital produced—or fixed—assets such as structures, equipment, research and development, and softwareflows of financial capital such as stocks, bonds, and bank depositsand the contributions of these flows to the accumulation of fixed assets.
Cantillon develops a circular-flow model of the economy that shows the distribution of farm production between property owners, farmers, and workers.
Farm production is exchanged for the goods and services produced in the cities by entrepreneurs and artisans. First, regulation impedes the flow of income throughout all social classes and therefore economic development. Second, taxes on the productive classes such as farmers should be reduced in favor of higher taxes for unproductive classes such as landowners, since their luxurious way of life distorts the income flow.
The model Quesnay created consisted of three economic agents: The "Proprietary" class consisted of only landowners. The "Productive" class consisted of all agricultural laborers.
The "Sterile" class is made up of artisans and merchants. Marx[ edit ] In Marxian economics, economic reproduction refers to recurrent or cyclical processes  by which the initial conditions necessary for economic activity to occur are constantly re-created.
Karl Marx developed the original insights of Quesnay to model the circulation of capital, money, and commodities in the second volume of Das Kapital to show how the reproduction process that must occur in any type of society can take place in capitalist society by means of the circulation of capital.
In the capitalist mode of production, the difference is that in the former case, the new surplus value created by wage-labour is spent by the employer on consumption or hoardedwhereas in the latter case, part of it is reinvested in production. The first to visualize the modern circular flow of income model was Frank Knight in publication of The Economic Organization.
Seen in the large, free enterprise is an organization of production and distribution in which individuals or family units get their real income, their "living," by selling productive power for money to "business units" or "enterprises", and buying with the money income thus obtained the direct goods and services which they consume.
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September Learn how and when to remove this template message Two sector model[ edit ] In the basic circular flow of income, or two sector circular flow of income model, the state of equilibrium is defined as a situation in which there is no tendency for the levels of income Yexpenditure E and output O to change, that is: The firms then spend this income on factors of production such as labour, capital and raw materials, "transferring" their income to the factor owners.
The factor owners spend this income on goods which leads to a circular flow of income. This basic circular flow of income model consists of six assumptions: The economy consists of two sectors: Households spend all of their income Y on goods and services or consumption C.
There is no saving S.
All output O produced by firms is purchased by households through their expenditure E. There is no financial sector. There is no government sector. There is no foreign sector Three sector model[ edit ] It includes household sector, producing sector and government sector.
It will study a circular flow income in these sectors excluding rest of the world i. Here flows from household sector and producing sector to government sector are in the form of taxes.
The income received from the government sector flows to producing and household sector in the form of payments for government purchases of goods and services as well as payment of subsidies and transfer payments. Every payment has a receipt in response of it by which aggregate expenditure of an economy becomes identical to aggregate income and makes this circular flow unending.
Four sector model[ edit ] A modern monetary economy comprises a network of four sector economy these are: Household sector Government sector Financial sector.
Each of the above sectors receives some payments from the other in lieu of goods and services which makes a regular flow of goods and physical services. Money facilitates such an exchange smoothly.
A residual of each market comes in capital market as saving which in turn is invested in firms and government sector.
Technically speaking, so long as lending is equal to the borrowing i.The circular flow of income is an economic model which depicts how the money flows in the economy.
The circular flow of income shows the major exchanges in the economy of . CIRCULAR FLOW OF INCOME The Circular Flow of Income, expenditure and output is a model of the economy which shows the movement of goods and services between households and firms and their corresponding payments in money terms Money circulates from households to firms and back again.
The more a households spend and the more firms produce, the higher the levels of income. The circular flow of income is a neoclassical economic model depicting how money flows through the economy.
In its simplest version, the economy is modeled as consisting only of households and firms. The circular flow of income or circular flow is a 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. Essay, Macro: Circular flow of income in Singapore and the US a.
Explain the difference in the relative importance of the components of the circular flow of income for a small and open economy such as Singapore versus a large and less open economy . The circular flow of income is an economic model which depicts how the money flows in the economy.
The circular flow of income shows the major exchanges in the economy of the money, goods, services etc.