Three sector model

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Three sector model

  1. 1. Prepared by: N. JYOTI THREE SECTOR MODEL CIRCULAR FLOW OF INCOME & EXPENDITURE WITH GOVERNMENT
  2. 2. The Circular-Flow Diagram <ul><li>The circular-flow diagram is a model that represents the transactions in an economy by flows around a circle </li></ul>
  3. 3. Circular-Flow of Economic Activities <ul><li>A household is a person or a group of people that share their income. </li></ul><ul><li>A firm is an organization that produces goods and services for sale. </li></ul><ul><li>Firms sell goods and services that they produce to households in markets for goods and services . </li></ul><ul><li>Firms buy the resources they need to produce— factors of production —in factor markets . </li></ul>
  4. 4. The Government Sector <ul><li>Government taxation ( T) reduces households’ disposable income and business funds </li></ul><ul><li>Government spending ( G) includes expenditure on collective goods and services and goods and services provided by the business sector, plus transfer payments </li></ul>
  5. 5. Three Sector Model
  6. 6. Leakages and Injections <ul><li>Leakages in the circular flow: Flows out of circular flow when resource income is received and not spend directly on purchases from domestic firms </li></ul><ul><ul><li>Savings(S) </li></ul></ul><ul><ul><li>Taxes(T) </li></ul></ul><ul><ul><li>Injections in the circular flow: Added spending in circular flow that does not come out of current resource income </li></ul></ul><ul><ul><li>Investment(I) </li></ul></ul><ul><ul><li>Government spending(G) </li></ul></ul>
  7. 7. Savings and Investment <ul><li>If planned (I+G) = planned (S+T) </li></ul><ul><li>so that injections = leakages </li></ul><ul><li>and total spending = total income </li></ul><ul><li>and demand = supply </li></ul><ul><li>then we have a stable economy </li></ul>
  8. 8. Contracting Economy <ul><li>If leakages are Higher than injections ( Planned S+T > Planned I+G ) , economy contracts resulting in </li></ul><ul><ul><li>inventory accumulation </li></ul></ul><ul><ul><li>too little spending </li></ul></ul><ul><ul><li>drop in prices </li></ul></ul>
  9. 9. Expanding Economy <ul><li>If injections are Higher than leakages (Planned I+G > Planned S+T) , economy expands resulting in </li></ul><ul><ul><li>more goods and services produced </li></ul></ul><ul><ul><li>higher prices </li></ul></ul>
  10. 10. Government and the Circular Flow <ul><li>Balanced budget: </li></ul><ul><ul><li>amount spent by government (G)= amount collected in taxes(T) </li></ul></ul><ul><li>Surplus budget </li></ul><ul><ul><li>amount spent by government (G)< amount collected in taxes(T) </li></ul></ul><ul><li>Deficit budget </li></ul><ul><ul><li>amount spent by government (G)> amount collected in taxes (T) </li></ul></ul>
  11. 11. <ul><li>Any </li></ul><ul><li>Queries </li></ul>

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