The Circular Flow Of Income

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In Economics, one of the most vital concepts is that of The Circular Flow Of Income. The aforementioned term refers to a model, which is a theoretical representation of how money in the economy moves. It also describes the circulation of money between various producers and consumers. In The Circular Flow of Income’s most descriptive or realistic model, there are five individual sectors;
• Household Sector
This is the sector that refers to the various members of society. All of these people are consumers. Consumers can save their money, or spend it on goods and services. The Household sector also supplies labour and time to the business sector. In return for such factors, consumers are rewarded with income. This comes in the form of a wage.
• Firms/Business Sector
This sector is a representation of the producers of goods and services. Logically, this is a very important sector that contributes to cash flow in an economy. A business needs labour and time that the household sector can provide.
• Financial Sector
This sector is the representation of those who borrow and lend money, for example, banks. Money that goes into the financial sector, is called savings, which is a leakage. Money that goes out, is called investment, which are injections.
• Government Sector
This sector is the representation of the government. Members of the household firm pay taxes, that go into the government sector, which is an example of a leakage. The government then spends money on things such as roads, education, and health care, which are examples of injections.
• Overseas Sector
This sector represents the trade that a country engages in with another country. If, for example, Australia purchases electronic equipment from China, it is called an import, ...

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... with, Production and income fall, and unemployment rates rise. This would occur when
S+T+M > I+G+X
As a result of there being less money for members of the household sector, they will tend to save their money, which is another example of a leakage.
Furthermore, since less money is being spent on goods and services, the amount of taxation the government receives from GST suffers also. Hypothetically speaking, the government will then also reduce its own spending, in an attempt to save money. This is a further example of another leakage

To conclude, leakages are acts that slow the rate of money through the flow of our economy. Savings, Taxation and Imports are all leakages. Acts that speed up the flow of money in the economy include Government Spending, Investment and Exports. Equilibrium is achieved when total leakages equal that of total injections.

S+T+M=I+G+X

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