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
Before the introduction of industrialization, the family and the household was the basic unit of manufacturing in Western Europe. The family members would work together in commerce, and agricultural...
Scotland’s economy is mixed market, which is where production is shared between both the private and public sector. The private sector is the part of the economy that is not controlled by the government, and is instead run by individuals and companies for profit. It consists of the businesses that are for profit, and are not owned / operated by the government whereas the public sector is the part of the economy that is controlled by the government, such as the police, primary education, public transit, healthcare etc, as well as services that benefit all of society, such as public education.
Bentley, J., & Ziegler, H. (2008). Trade and encounters a global perspective on the past. (4th ed., Vol. 1, pp. 182-401). New York: McGraw-Hill.
The author starts by explaining how the government got involved with the financial sector by
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