Circular Flow of Model in Three Sector Economy

In three sector economy, there are household, business and government sector. There is government intervention. Besides the income and expenditure, there is government purchases or expenditure and taxation come into play. Government purchases are injections while taxation is leakages.

Assumptions :

a)     There are three in the sectors: Household, Business and Government Sector.

b)     There is provision of saving.

c)     There is government intervention.

d)     Business sector do not carry out any import or export activities.

From the view point of the circular flow of income, each sector has dual roles to play in the economy while a sector receives a certain payment from the other sectors, it pays back to those sectors as well. The circular flow of income in different sectors can be expressed as follows:

1. Household Sector

It owns factors of production and supplies to business and government sector. It consumes goods and services produced by the business sector. It supplies factors of production to the business and government sector.

i. Receipts

It receives the factor income in the form of rent, wages, interest and profit from the business sector and government sector for supplying factors of production. It also receives the transfer payments from the government sector.

ii. Payment

The income of the household sector flows into the business sector, government sector and capital market in the form of consumption expenditure, tax and saving respectively.

2. Business Sector

It produces and supplies goods and services in the economy and hires factors of production from the household sector.

i. Receipts

It includes income from the sale of goods and services from household sector and government sector. It borrows money from the capital market. It also gets subsidies from the government sector.

ii. Payment

It includes the factors payments and tax payments to the household sector and government sector respectively.

3. Government Sector

It has the authority to pass rules and regulation, laviate taxes to the household sector and business sector, hires factors of production from the household sector and purchases goods and services from the business sector.

i. Receipts

The major source of the income for the government sector include the taxes paid by the households and business sectors. It also receives interests and dividends for the investments paid.

ii. Payment

It pays to the business sector in the return for the goods and services purchased and also provides subsidies. It pays factor payments to the household and also makes transfer payments to the household.