Then, list on the chart all of the business organizations that Abby and Andy made contact with during the day. All those currents’ make up the circular flow of economic activity. 9,100. This act on the part of the government to levy taxes and to spend more is called fiscal action. Share Your Word File Finally, write in the name of Abby’s and Andy’s factor market. Introduction to the Circular Flow of Economic Activity: The all pervasive economic problem is that of scarcity which is solved by three institutions (or decision-making agents) of an economy. We know that in a closed economy with no government activity the income (Y) is divided between consumption expenditure (C) and investment expenditure (i) We also know that whatever part of income is not consumed is saved (Y = C + S). Government incurs expenditure on goods and services and gets receipts in the form of taxes. 10,000 (in the above example) and decide not to spend—as a result consumption expenditure will fall to Rs. 8,100—what is therefore, required is some source of demand (injections) worth Rs. From the ‘consumers’ viewpoint, these transactions take the form of: (i) Sale of factor services to business sector. This is the two sector economic model showing how firms, or businesses, and consumers, or households, interact. on the flow chart. In order to attain the circular How of economic activity necessary adjustments of transactions in the various sectors of the economy are made. In the model the total output is worth Rs. The circular flow model demonstrates how money moves through society. What is the definition of circular flow model?The continuous flow of money between these sectors and markets guaranteed the exchange of products and services between consumers and producers, thereby enabling both sectors to pay their taxes to the government. Through economic activity (production, consumption, capital formation etc. Enterprises and government agencies too can each be grouped also. The working of the three sector model involving government transactions, taxes and expenditure is shown in the model given in Fig. But as the business sector is producing output worth Rs. Even in two sector model based on simple assumptions mentioned above there may be leakages from the income stream in the form of savings by the household sector. This circular flow of economic activity is maintained not only in two sector closed simple economy but also in three sector economy and four sector open economy in which we take into consideration the foreign trade sector transactions. If intended investment remains as before (Rs. The circular flow analysis is the basis of national accounts and hence of macroeconomics. Accordingly, the economic agents in the business sector are called ‘producers’ and economic agents in the household sector are called ‘consumers’. Economic Model #1: The Circular-Flow Diagram One model that helps explain how a market economy works is a circular-flow diagram. However, should the business sector decide to buy the leftover output worth Rs. (ii) Purchase of final output from business sector. We know that the economic activities and money have a circular flow. 10,000—there will be unintended accumulation of goods worth Rs. Country A has the following economic factors: Country A (which has an ideal balance of Y = C+I as per the income expenditure theory) is subjected to an interest rate hike by the banks. Households own all economic resource or factors of production. What Is the Circular Flow Model in Economics? 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