![]() Circular Flow Model in the Four Sector Economy Leakage from and injection into the economy takes place as a result of imports and exports of goods. This sector encompasses imports and exports with other nations–international, rather than intranational, trade. But typically the government then uses this money to engage in the injection into the economy described above. Leakage occurs via taxation, including income and sales taxes, among others. The government can also spend on services like welfare programs and business subsidies. Injection occurs via spending on products and resources–government spending–the government provides public goods such as roads, education, and so forth. The government is responsible for both injection and leakage. The government sector also passes laws and collects taxes. Government spending is a highly significant portion of the GDP. In terms of injections (also defined in the previous section), investment and loans are also facilitated/offered by these institutions, contributing to the household and firm sector. Leakage (see definition above) occurs via banks, when savings by households and businesses are deposited–the money that would have been flowing through the economy and being used is, instead, removed and held. These are the three most significant factors excluded from that basic model: 1. This makes the circular flow model easier to understand but excludes significant elements of the economy that are quite important to understand how it functions in full. The basic model is quite simplified in that it incorporates just two sectors: the household and firm sectors. income tax and value-added tax (VAT)įactors Excluded from the Basic Circular Flow Model
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