Circular Flow of Economic Activity Essay

IntroductionTo analyze an economy as a whole economists developed diffe select instances. The significance of these economical models enable us to to a lower placestand the economic activities more(prenominal) vividly. For this purpose an economy can be classified in to four major bena. Which includes house hold fasts, firms, authorities and outside celestial sphere or external vault of heaven. There is a simple model which arrive at two heavenss, that is mobs and firms. Its working can be understand with the help ofcircular play of economic activity of two area model. Gradu exclusivelyy the role of political science considered as an important one and the administration sector also include to this model. This is popularly known as the three sector model economic activity. But now the four sector model conk out more important, because almost all the countries ar ease uped and they are actively act in foreign employment (export and import). So, the four sector m odel representing an hold economy. Here this hub very briefly explained about the interactions amid these four sectors and its working. quartet vault of heavens of an EconomyAs mentioned above there are four inherent parts or sectors consisting in a four sector model economy. They are house hold sector, firms, government and foreign sector. Each of them are briefly explained below. Household sector It consist of peoples or individuals. House hold sector provides reckons for achievements kindred labor, take, building, seat of government etc. Consumers are also listed under household sector. Firms It refers to the various industries which providing goods and function to satisfy the demand of households. Firms are hiring the factor functions supplied by households and firms rewarded them in various cooks like wages for labor, rent for land and building etc. Government It is an important part of all economy. The main function of government sector includes insurance maki ng, implementation of policies, faithfulness and order etc. The government may make fiscal policy or monetary policy. They adjust policy instruments to stabilize the economy.The instruments may in the form of tax, subsidies, factor payments etc. Foreign sector foreign sector is an integral one for any abrupt economy. Since the international trade become more active every country take it as a vital one to make policy, improve national growth etc. in an openeconomy, factor rewards are flowing both in to the economy and out to the economy. Whatever may be the flow of exercise s it pull up stakes come under the foreign sector or external sector. It includes imports, exports, granting loans between countries, payments for renting services like shipping, air services etc.The Four Sector ModelThe economic activities or interactions between these four sectors of an economy can be explain with the help of a figure as showing below.Household SectorInitially household sector provides its factors of productions like land, labor, capital and organizer to the firms. And they ordain be rewarded by firms in different kinds. That is a labor bequeath earn wage, capital will earn interest, organizer will earn profit and land will earn rent. After making products or output households will demand it and they pay their consumption expense. Here the factors of production are provide with factor market and goods and services (output) are supplying through goods market. Similarly, households interact with government sector in two ways. Firstly, the household sector will pays taxes, which may direct or confirmatory taxes. Then the government may authorise money in the economy for household sector in the forms like pensions, scholarships etc. Household sector interact with foreign sector in two kinds. Household sector receive impart payments from abroad for providing their services in abroad. When the economy import something households will spend their income on imported g oods. So, import is considered as a leakage from the economy.FirmsFirms are producing the goods and services. For that firms are hiring factor services supplied by household sector. After the production process they will sell the output in the goods market or commodity market. So, the firm sector will receive consumption expenditure of household sector. Firms are actively interact with government. Since taxes from military control sector is frequently important for government, it is the expenses of firms and revenue for government. Sometimes government may provide subsidies for line of descent firms by aiming different purposes. So, subsidies are the expenses of government sector and a alms for the business firms. Business firms are very activelyinteract in foreign sector. The income of firms increase when they export goods and services to abroad. Similarly when theydemand capital goods, machines, raw materials etc, it will consider as an expenditure to the firms.Government Secto rGovernment sector interact with household sector by providing transfer payments in the form of pensions, bonus, scholarships etc. Similarly government earn both direct and indirect taxes from household sector. Government sector also earn taxes from firms from their business activities. higher up all government provides many assisting support for enriching business sector like granting subsidies, price ceiling etc. Today, every government has a vestige with foreigners. They also assisting by providing loans, technical assistance etc. so, there will also be the inflow or bombardment of income and output.Foreign SectorForeign sector plays a vital role in an open economy. When household sector demand more, the import will increase and break to a deficit foreign trade account. On the other give foreign sector make payments on services provided by household sector in abroad.s Foreign sector pays on commodities exported by firms to abroad. So, it is a injection to the economy. Simila rly foreign sector also pays on the service provided by firms in the form of air services, software etc. when tourists visits municipal economy, they will spend money, so it is also an inflow to the economy. Similarly government sector also interact with government. If government make any trade with foreign sector, there will be inflow or outflow of income.ConclusionIn short, four sector model economy is an open economic model. Which showing a simple picture of the economy and economic activities. In a four sector model economy all the sectors are interacting with each other in many ways. So, it reduce the complexity for understanding the complicated activities.