Three sector model

1. Prepared by:
N. JYOTI
THREE SECTOR
MODEL
CIRCULAR FLOW OF
INCOME & EXPENDITURE
WITH GOVERNMENT

2. The Circular-Flow Diagram
The circular-flow diagram is a model that
represents the transactions in an economy by
flows around a circle

3. Circular-Flow of Economic Activities
•A household is a person or a group of people that
share their income.
•A firm is an organization that produces goods and
services for sale.
•Firms sell goods and services that they produce to
households in markets for goods and services.
•Firms buy the resources they need to produce—
factors of production—in factor markets.

4. The Government Sector
•Government taxation (T) reduces
households’ disposable income and
business funds
•Government spending (G) includes
expenditure on collective goods and
services and goods and services provided
by the business sector, plus transfer
payments

5. Three Sector Model

6. Leakages and Injections
•Leakages in the circular flow: Flows out of
circular flow when resource income is received
and not spend directly on purchases from
domestic firms
–Savings(S)
–Taxes(T)
•Injections in the circular flow: Added
spending in circular flow that does not come
out of current resource income
–Investment(I)
–Government spending(G)

7. Savings and Investment
If planned (I+G) = planned (S+T)
so that injections = leakages
and total spending = total income
and demand = supply
thenwe have a stable economywe have a stable economy

8. Contracting Economy
If leakages are HigherHigher than
injections (Planned S+T > Planned I+G),
economy contracts resulting in
–inventory accumulation
–too little spending
–drop in prices

9. Expanding Economy
If injections are HigherHigher than
leakages (Planned I+G > Planned S+T),
economy expands resulting in
–more goods and services produced
–higher prices

10. Government and the
Circular Flow
•Balanced budget:
–amount spent by government (G)=
amount collected in taxes(T)
•Surplus budget
–amount spent by government (G)<
amount collected in taxes(T)
•Deficit budget
–amount spent by government (G)>
amount collected in taxes (T)

11. Any
Queries