![]() ![]() The following diagram can be used to illustrate the interrelationships between economic factors in explaining the functioning of a simple economy in terms of circular income flows. There is no government savings and no capital goods production in this economy. In this economy, the household sector supplies all of its production factors to the manufacturing sector and utilities the proceeds completely. The Circular Flow in a Two Sector Model – Simple Economyīoth the household and business sectors operate in a simple economy. This leads to the receipt of foreign factor income and payment. Provide production subsidies to the business sectorįoreign Sector includes the import and export of goods and services.Provide consumer subsidies to households.Provide capital for economic common tasks such as highway and communication. ![]() Provide services such as education and health.In addition, the following are some of the services provided by the government. Government maintains national security, law and order and provides public goods, welfare goods and services to the public from tax revenue collected from the government. They invest the profits of their businesses, and also give dividends to the owners and a portion of the tax to the government. ![]() The business sector generates revenue from the sale of manufactured goods. The business sector produces goods and services by purchasing production factors from the household sector. What is business sector in circular flow? Also, they utilizes public services provided by the government. Household creates savings in an economy and they are pay taxes to the government. Goods and services produced by the business sector are purchased by households. The business sector generates revenue by providing production factors. Households own factors of production, such as labour, land, buildings and capital. They are,Įach of these aspects is described below. The overall economy consists of four main sectors. In other words, it shows the cyclical flow of money and products between households and businesses. It represents the mutual exchange of financial and real flows between economic factors. The circular flow of economic activity is a very simple model of the entire economic process of a market economy. ![]()
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