Circular Flow of Income

Revision The Five Sectors

Household sector
Business sector
Financial sector
Government sector
Overseas sector
 Household Sector
Consists of all individuals in the economy.
Owns all the factors of production;
land, labour, & capital.
To generate an income households sell their
factors of production so that it can purchase
economic goods.
 Business Sector
Consists of all enterprises in the economy that
produces economic goods.
Needs to purchase factors of production from
the household sectors, so that it can produce
economic goods.
 Financial Sector
All institutions involved in borrowing and
lending money.
Banks, building societies, finance companies, etc.
Borrow money from households and
businesses and lend to others.
 Government Sector
All three levels of government.
local, state and federal.
Also includes government business
enterprises.
Taxes households and purchases economic
goods from the Business sector (government
expenditure)
 Overseas Sector
Consists of all foreign transactions.
Exports = economic good produced domestically
and sold overseas.
Imports = economic good produces overseas and
sold domestically.
The 5 sector circular flow model
Income - wages, rent interest, profit

Factors of production - land, labour capital

Household Business
Sector Sector
Economic goods

Consumption

Savings (S) Financial Investment (I)

sector

Taxation (T) Government Government

Sector expenditure (G)

Imports (M) Overseas Exports (X)

sector
 Questions
1. Give an example of each of the following:
a. Government spending
b. Investment
c. An export
d. An import
e. Savings
f. Taxation

2. Between which two sectors do each of the following transactions take

place?
a. Purchasing a car from an Australian business
b. Paying tax on your income
c. A State Government project to build a new train line
d. Depositing money into your bank account
e. Purchasing shares on in the stock market
 Leakages and Injections
Leakages = Money leaving the economy
Savings
Taxation
Imports

Injections = Money entering the economy

Investment
Government expenditure
Exports
 Leakages and Injections
Income - wages, rent interest, profit

Factors of production - land, labour capital

Household Business
Sector Sector
Economic goods

Consumption

Savings (S) Financial Investment (I)

Leakages Injections
sector

Taxation (T) Government Government

Sector expenditure (G)

Imports (M) Overseas Exports (X)

sector
 Equilibrium & Disequilibrium
If leakages (S, T, M) and Injections (I, G, X) are equal
then then market is said to be at equilibrium.
The amount of money in the economy will not change.
The level of economic activity will not change.

If leakages (S, T, M) and injections (I, G, X) are not

equal the economy is said to be in disequilibrium.
The amount of money in the economy will change.
The level of economic activity will change.
 Contracting Economy
If leakages are greater than injections:
S+T+M>I+G+X
More money is leaving than is entering
The economy will contract
Economic activity will decline
 Expanding Economy
If injections are greater than leakages:
I+G+X>S+T+M
More money is entering than is leaving
The economy will expand
Economic activity will increase
 Questions
1. Are the following leakages or injections?
a. Purchasing a T-shirt online from the USA
b. A tax on goods and services
c. German tourists visiting Perth and paying for accommodation and
meals
d. Government spending on a new sports stadium

2. Will each of the following cause the economy to expand or

contract?
a. Increased investment
b. Higher taxes
c. Rising export sales
d. Reduced government spending
e. A higher rate of savings
f. Fewer imports