Explain with the aid of a diagram the circular flow of goods, services, income and spending in a three sector economy.
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.
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.
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.
Explain The Circular Flow Of National Income?
Two sector circular flow of NI