Give two examples of macroeconomic studies. There is no saving (S). For the factors of production, these are factor incomes known as rent, wages, interest and profit which have been generated in the production process. Why is study of problem of unemployment in India a macroeconomic study? In the upper loop of this figure, the resources such as land, capital and entrepreneurial ability flow from households to business firms as indicated by the arrow mark. Leakages and Injections. Let us understand these different circular sectors in detail. This becomes injection in circular flow as shown in Fig.(b).Fig. Explain circular flows of income in (i) two-sector economy, (ii) three-sector economy, and (iii) four-sector economy. Thus seen, (i) savings and (ii) taxes by households and firms and (iii) imports constitute a leakage from the circular flow of income (money) whereas (i) investment, (ii) government expenditure, and (iii) export payments are injections into the circular flow of income (money). It is that part of economic theory which deals with the behaviour of national aggregates. Circular Flow of Income and Expenditure-Four Sector Economy (b) Circular flow of income in a three-sector economy. As we have already seen, a free market economy consists of two components, or sectors,as they are called. It clearly depicts the leakages and injection in any economy. (c).Significance of circular flow of income (i) It reflects structure of an economy. The model assumes that there is no financial sector, no government sector, and no foreign sector. Examples are: National income, national savings, general price level, aggregate demand, aggregate supply, inflation, unemployment, etc. In the basic two-sector circular flow of income model, the economy consists of two sectors: (1) households and (2) firms. The household sector is the source of factors of production who earn by providing factor services to the business sector. Meaning of macroeconomics — "Macroeconomics is the study of overall averages and aggregates covering the whole economy and examines the interrelationship among various aggregates." Investment It is the process of capital formation by a firm or increase in the stock of existing capital … One of the main basic models taught in economics is the circular-flow model, which describes the flow of money and products throughout the economy in a very simplified way. The circular flow model in the two-sector economy is a hypothetical concept which states that there are only two sectors in the economy, household sector and business sector (business firms). Meanwhile, the firms use the resources to produce goods and services that they ultimately sell back to the households. External sector. Circular Income Flow in a Two Sectors economy: Real flows of resources, goods and services have been shown in Fig. The national income and national product accounts of a country describe the economic performance or production performance of a country. The structure of macroeconomy is given by circular flows of income and output. Households spend all of their income (Y) on goods and services or consumption (C). Financial market invests money by lending out money to households, firms and the government. Circular Flow of Income in a Two-Sector Economy: There are only two sectors namely, household sector and firm sector. In fact national income accounting has its foundation in the model of circular flows which can be depicted in two-sector, three-sector and four-sector models as explained below. Government makes transfer payments (like old age pension, scholarships) to households and grants subsidies to firms.All these cause flow of money which are shown in Fig.(c).Fig. The household sector is the source of factors of production who earn by … Simply put 'it is study of the economy as a whole'. In this video, we explore how to model this in a straightforward way using the circular flow model. No government interventions over the economic activities. The circular flow model is an economic model that shows the flow of money through the economy. The circular flow of income not only takes place in two sectors closed economy, but it also takes place in three sector economy as well as the four-sector open economy in which foreign trade transactions are also considered. Download the PDF Question Papers Free for off line practice and view the Solutions online. The circular flow model starts with the household sector that engages in consumption spending (C) and the business sector that produces the goods. Its main tools are demand and supply of particular commodity/factor. It is concerned with the determination of equilibrium level of income and employment supply, inflation, unemployment, etc. It studies not an individual economic units like a household or a firm or an industry (i.e. Services. Mind, imports are leakages and exports are injections into the circular flows of income in the economy. Similarly there is no saving by the households, who spend all what they earn; and no investment by the firms. (i) Household Sector: The household sector is the sole buyer of goods and services, and the sole supplier of factors of production, i.e., land, labour, capital and organisation. (iv) It helps in estimation of national income and its related aggregates. 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