3.

Income determination in a Four Sector Model

Dr. U.B. Raju

*Compiled from different published sources *Strictly for academic purpose and for restricted private circulation

Circular Flow of Income

Circular Flow 2 Sector model

Income (Y) Wages, Salaries, Rent, Interest & Profit

Factors of production Labour, Land, Capital and Enterprise

Consumers
Goods and Services

Producers

Consumption spending (C)

Circular Flow of Income 2 Sector model

Income (Y)
Wages, Salaries, Rent, Interest & Profit

Consumers

Producers

Consumption spending (C)

(Figure 1)

Circular Flow 3 Sector model

Financial sector - with Savings as a leakage
Income (Y) Wages, Salaries, Rent, Interest & Profit

Consumers

Producers

Consumption spending (C)

Savings (S)

Financial Sector

Circular Flow 3 Sector model

Financial sector
Income (Y) Wages, Salaries, Rent, Interest & Profit

Consumers

Producers

Consumption spending (C)

Savings (S)

Investment (I) (Figure 2)

Financial Sector

Circular Flow of Income

As long as Savings equals Investment the economy will not expand or contract
S =I

If Savings is larger than Investment the leakage will contract the economy
S>I

If Investment is larger than Savings then the economy will expand (There is an injection of extra funds)
S<I

(Think of a balloon leaking air or being blown up)

Circular Flow of Income

Four Sector Model
Consumers, Producers, Financial and

Government

Income (Y)

Consumers Consumption spending (C)

Producers

Taxation

Government Sector

Circular Flow of Income Four Sector Model

Consumers, Producers, Financial and Government
Income (Y)

Consumers Consumption spending (C)

Producers

Government Sector

Circular Flow of Income

Four Sector Model
Consumers, Producers, Financial and Government Sectors

Income (Y)

Consumers Consumption spending (C)

Producers

Savings (S)

Investment (I) Government Spending (G)

Taxation (T)

Government Sector

(Figure 3)

Circular Flow of Income

As long as Taxation equals Government Spending the economy will not expand or contract If Taxation is larger than Government Spending there is a leakage and the economy will contract If Taxation is less than Government Spending there is a injection into the economy and it will expand

Circular Flow of Income

Five Sector Model
Consumers, Producers, Financial, Government and Overseas

Income (Y)

Consumers
Consumption spending (C)

Producers

Imports (M)
Overseas Sector (O/S)

Circular Flow of Income

Five Sector Model
Consumers, Producers, Financial, Government and Overseas

Income (Y)

Consumers
Consumption spending (C)

Producers

Imports (M)
Overseas Sector

Exports (X)

Circular Flow of Income

Five Sector Model
Consumers, Producers, Financial, Government and Overseas

Income (Y)

Consumers
Consumption spending (C)

Producers

Savings (S)

Investment (I)

Taxation (T)
Government Sector

Spending (G)

Imports (M)
Overseas Sector

Exports (X)
(Figure 4)

Circular Flow of Income

Savings, Taxation and Imports are leakages Investment, Govt. Spending and Exports are injections into the economy Savings and Investments can be altered by the Reserve Banks control of interest rates Taxation and Govt. Spending can be adjusted by the Govt.s Budget. Imports and Exports is very difficult to make adjustments market forces prevail.

Circular Flow of Spending and Income