of Income

of Income The circular flow of income is a model of an economy showing connections between different sectors of an economy. It shows flows of income, goods and services and factors of production between economic agents such as firms, households, government and nations. The circular flow analysis is the basis of national accounts and macroeconomics. - - Introduction to Macro Economics Goods and services Factors for production Consumer expenditure Wages, rent, dividends Households Firms In a two-sector economy, production and sales are equal and there will be a circular flow of income and goods. The outer circle represents real flow (factors and goods) and the inner circle represents the monetary flow (factor prices and commodity prices). Real flow indicates the factor services flow from household sector to the business sector, and in turn goods and services flow from business sector to the household. The basic identities of the two-sector economy are as under: Y = C + I Where Y is Income; C is Consumption; I is investment . . .  Circular Flow of Income in a Three-Sector Economy: In addition to household and firms, inclusion of the government sector makes this model a three-sector model. The government levies taxes on households and firms, The Domestic Circular flow of Income & Spending Purchases of goods and Service Wages, dividends, interest, profits and rent ₹ Taxes Taxes Demand Incomes Govt Purchases Social Transfers Households Government Firms ₹ - - Introduction to Macro Economics purchases goods and services from firms, and firms receive factors of production from household sector. On the other hand, the government also makes social transfers such as pension, relief, subsidies to the households. Similarly, Government pays the firms for the purchases of goods and services. The Flow Chart illustrates three-sector economy model: Under three sector model, national income (Y) is obtained by adding Consumption expenditure (C), Investment expenditure (I) and Government expenditure (G). Therefore: Y = C + I + G . .  Circular Flow of Income in a Four-Sector Economy: Purchases of goods and Service Wages, dividends, interest, profits and rent ₹ Taxes Taxes Demand Incomes Govt Purchases Social Transfers Households Government Firms ₹ Rest of the World