Answer to Question #220437 in Macroeconomics for Parinthapa

Question

“The circular flow of income is an economic model which exhibits the foundation of the transactions that build an economy.”— Discuss the statement and show how this model works in a three-sector economy.

Answer 1

The circular flow model is an economic model that depicts how money, goods, and services circulate through sectors in an economy. Money flows between sectors are also tracked to calculate a country's national income or GDP, hence the model is also known as the circular flow of income.

The government is added to the two-sector model in the three-sector model. Money goes from people and businesses to the government in the form of taxes in this scenario. The government repays through government expenditures such as subsidies, benefit programs, and public services.