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The Economic Participants

The circular flow of income in a four-sector economy consists of households, firms, government, and the foreign sector. Households provide factor services to firms, government, and foreign sector in exchange for factor payments and transfer payments. Firms receive revenue from households, government, and foreign sector for goods and services, and make payments for factor services and taxes. Government receives revenue from taxes, fees, and sector for goods/services, and spends on transfer payments and subsidies. The foreign sector receives revenue from exports and makes payments for imports and factor services.

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132 views2 pages

The Economic Participants

The circular flow of income in a four-sector economy consists of households, firms, government, and the foreign sector. Households provide factor services to firms, government, and foreign sector in exchange for factor payments and transfer payments. Firms receive revenue from households, government, and foreign sector for goods and services, and make payments for factor services and taxes. Government receives revenue from taxes, fees, and sector for goods/services, and spends on transfer payments and subsidies. The foreign sector receives revenue from exports and makes payments for imports and factor services.

Uploaded by

Mmapontsho Tshabalala
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© © All Rights Reserved
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CIRCULAR FLOW: THE ECONOMIC PARTICIPANTS

Circular flow of income in a four-sector economy consists of households,


firms, government and foreign sector.

Household Sector:
Households provide factor services to firms, government and foreign
sector.
In return, it receives factor payments. Households also receive transfer
payments from the government and the foreign sector.
Households spend their income on:
(i) Payment for goods and services purchased from firms;
(ii) Tax payments to government;
(iii) Payments for imports.

Firms:
Firms receive revenue from households, government and the foreign sector
for sale of their goods and services. Firms also receive subsidies from the
government.
Firm makes payments for:
(i) Factor services to households;
(ii) Taxes to the government;
(iii) Imports to the foreign sector.

Government:
Government receives revenue from firms, households and the foreign
sector for sale of goods and services, taxes, fees, etc. Government makes

factor payments to households and also spends money on transfer


payments and subsidies.

Foreign Sector:
Foreign sector receives revenue from firms, households and government
for export of goods and services. It makes payments for import of goods
and services from firms and the government. It also makes payment for the
factor services to the households.
The savings of households, firms and the government sector get
accumulated in the financial market. Financial market invests money by
lending out money to households, firms and the government. The inflows of
money in the financial market are equal to outflows of money. It makes the
circular flow of income complete and continuous. The circular flow of
income in a four-sector economy is shown in Fig. 1.7.

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