Explain The Circular Flow Of NI In The Three Sector Economy?

9 Answers

Jack Buckby Profile
Jack Buckby answered
  • Some advice
This is an academic question that requires an equally academic response. This question appears to have been asked as some kind of question in either a question booklet or an exam, and in order to be able to answer this economics question you're going to need to search for information somewhere else than the Internet. Whilst you may be able to get some relevant information on the Internet, you won't be able to get the precise information that relates to the diagram that you're talking about. This diagram is more than likely something that has been outlined and shown to you in your class.

  • Textbooks
Textbooks are the best places for all students to look when they need help with their studies. As well as obtaining information from your teachers and in class, your textbooks are there to ensure that you're able to obtain as much information as you can about a particular topic, and the diagram that you need will no doubt either explained or outlined in the textbook. Your textbook will either have been provided to you back at the beginning of the course, or if you're in university, should have been recommended to you at the beginning of the course. In University you are required to get your own textbooks, so by looking at the list that is provided to you at the beginning of your course you'll know which books you need to answer questions just like these.

For more assistance, contact your teacher as well. Your teacher will always be there to help you if you are having problems, so don't feel like you can't talk to them about your problems. If you explain you simply don't understand the question then they will come up with a solution that allows you to really understand what the question is about and how it needs to be answered, with the diagram.
Muhammad Abdullah786 Profile
Accordingly, NI equations will be as
Y= C+I and Y= C+S
An economy may consist of three sectors; the economy is consisting of consumers, producers and government. Accordingly, NI equation will be
Y= C+I+G and Y= C+S+T
An economy may consist of three sectors the economy is consisting of consumers, producers and foreign trade. Accordingly, NI equation will be as
Y= C+I+G+M and Y= C+S+T+X
The circular flow of NI is based upon two principles.
As a result of each economic transaction the seller gets how much is spent by the buyer.
If goods and services have a flow towards a particular direction, the money has also a flow towards the other direction.

As we are constructing the circular flow of NI in two sector economy, then whatsoever is producer by the producers is sold out to the consumers. The goods produced represent NI while the consumers spend all of their earning on the consumption of goods produced by the producers such expenditures also represent NI. The consumers or household provide the services of four factors to the producers. Against such services, the factors of production get the remunerations such earnings also represent NI. So these earnings and expenditures represent the NI.
Anonymous Profile
Anonymous answered
My attempt would be the following. I think you're after an explanation of the Circular Flow of Money though.

When an initial person spends an initial sum of money, the person who receives it can either spend it or save it. Typically they will do a mixture of both, they will save a proportion and they will spend a proportion. The proportion that is spent is dealt in the same way with the person that receives it as it was with the person who last received it. As a result, we get a huge, endlessly operating circle of people spending their wealth, and this is cycle of money.

A complex method of understanding this is by looking at the Marginal Propensity to Consume, the MPC. This is linked in to what is called the multiplier. There is also a Marginal Propensity to Save, MPS, which is equal to MPS=1-MPC. We can explain this relationship with the idea that what isn't saved, is consumed, and vice versa. The multiplier is the amount by which an initial amount of spending changes the economy as a result of the MPC and circular flow effect.

Not the best explanation, but an attempt, hope it helps.
Muhammad Abdullah786 Profile
Three sector economies consist of consumers, producers and government. In the presence of government, there will be government purchases. Hence, in product market, government expenditures will also be included. In such situation, the national output will consist of monetary value of final consumption, final investment goods and final government purchases. For the production of the three above mentioned goods and services, the factors of production have to be employed. Then, there rise the resources or factor market. Against such factors of production, the wages, rent, profit and interest have to be paid. The summation of such factors payments is known as NI at factor cost.

Here, the size of NI will be greater than two sector economy. In the three sector economy, household and firms pay tax to the government. The consumers make the savings which create financial market. The firms get loans from this financial market and make investment or produce capital gods. Moreover, government also gets loans from money market. The amount collected through taxes and gotten through financial market is spent by the government on government purchases. All this shows that NI moves like a circular flow from consumers to produce and vice versa. However, in such economy, there are government expenditures which also generate GNP.
Khadija Brohi Profile
Khadija Brohi answered

Answer Question