Question

using a circular flow diagram ,illustrate the flow of income and spending for a model including the foreign sector .clearly describe and indicate leakages the direction of the flows

Answer 1

Here we consider a four-sector economy which is an open ended economy that goes beyond by considering the foreign sectors role in the overall economic cycle.

• The money flows from households when they buy goods and services from a foreign country, also known as imports.
• The money flows back to households when foreign countries give them employment and then pay them salaries as shown above.
• If the value of imports is equal to the value of exports, it is called a balanced trade. If imports are greater than exports, it is a trade deficit If exports are greater than imports, it is called a trade surplus.