In the in the below diagram, the circular flow of the four sector open economy with saving, taxes and imports shown as leakages from the circular flow on the right hand side of the diagram and investment, government purchases and exports as injections into the circular flow on the left side of the figure. Ltd, located in Hun Chun City, China, are exported to other countries for sale, a portion of the exporting are directed to the headquarters located in the United States. The upper half of the diagram in Figure1 represents product markets, in which households exchange moneyfor goods and services produced by firms. How does a business increase production when they anticipate being able to sell more of their product? For example, goods actually supplied must be equal to goods actually demanded. So the size of an economy can be measured using either the income, output or expenditure method. Similarly, the government receives payments from foreigners when they visit the country as tourists and for receiving education etc. Financial institutions or capital market play the role of intermediaries.
Leakage In a closed circular income stream, money flows continuously from firms to households. In some cases, such as with the United States during the 1990s and '00s, a government depends entirely on foreign investment. Taxes Net taxes are the second largest cause of leakage in the circular flow of income in a system closed off from the rest of the world. Thus, in an open economy, planned leakages need not be equal to planned injections in each country as long as they are equal globally through capital flows among them. The demand arrow in thetop loop shows why the businesses make this effort to satisfy theconsuming households.
In addition, the government spent more than it received in taxes. It is important to understand that our savings are not loaned out by banks. In other words, the producers got stuck with the unsold goods. This is shown on the right hand side of the diagram. S and T are also leakages, but are not contained within C, I, G or X.
Effect Ultimately, a government must balance its leaks with inflows of cash. Our tutors are highly qualified and hold advanced degrees. Our tutors can break down a complex Balance of payments sector, Government expenditure problem into its sub parts and explain to you in detail how each step is performed. Income taxes, property taxes and payroll taxes go directly to the government. Put very simply, savings are deposited in the banking sector or the capital markets, and the firms borrow to invest from the same sort of sources.
The injection into the economy is the exports X. We further assume thathousehold are the sole buyers of goods and services and that theyspend their entire income. If exports exceed imports, the economy has a surplus in the balance of payments. And if imports exceed exports, it has a deficit in the balance payments. There are no injections into this circularflow and no leakages from the circular flow like saving at this stage.
Of course, the economy is only in an equilibrium position if the plans are the same. Households spend all of their money on goods and businesses spend all of their money on labor and expansion. The government also spends tax dollars on projects for the public good, such as parks and roads. The green line shows the factors of production going from the households to the firms and the red line shows the money payments by the firms for these factors going back to the households. Please do send us the Circular Flow of Income in a Four Sector Economy in Four Sector Economy problems on which you need help and we will forward then to our tutors for review. Although the amount that households plan to save may not be the same as the amount that firms plan to invest, the actual amounts are always equal.
It is fairly obvious that the amount of money spent must equal the value of the goods and services that this money is spent on. Spent on foreign-made goods and services, i. An open economy allows for more varied interplays between planned vs actual leakages and injections among countries. Large companies have factories or production facilities in less developed countries, these factories create wealth for the company which is then not transferred to the economy of the host country and instead to that of the corporation involved. If the suppliers have put goods into the market at a cheaper price, demand will increase. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. This is a basic way of understanding how different parts of the economic system fit together.
But government deficit spending i. In the factor market, resources land, labour and capital are owned by households and supplied tobusinesses that demand these factors in return for money payments. Canavan, Rae, and Ross, 2009, pp. Because there is more money in the economy. Banks - take savings and lend for spendings. Businesses therefore mustpurchase all resources from the households.