Half of the model includes injections, and half of the model includes leakages. An example of a group in the finance sector includes banks such as Westpac or financial institutions such as Suncorp. Money paid to foreign companies for imports (M) also constitutes a leakage. Injections can take the forms of investment, government spending and exports. Sometimes, households will save their money, purchase foreign goods, or use their income to pay taxes. It is important to note, that not all money will be used to purchase goods and services from firms. The circular flow shows that some part of household income will be: 1.Put aside for future spending, i.e. Figure 11 shows that taxes flow out of the household and business sectors and go to the government. Businesses act as buyers and households act as sellers. Consumers and firms are linked through the product market where goods and services are sold. Finally, the government creates flows both to the households and the businesses, offering services and receiving funds. The government sector includes all the government agencies on a local, state, and federal level, which are responsible for the legislation and the proper functioning of the market. This is a leakage because the saved money can not be spent in the economy and thus is an idle asset that means not all output will be purchased. Ans: The circular flow of Income refers to the flow of money, services, and goods, etc. The household sector includes the consumers who have disposable income to spend on goods and services, seeking to satisfy their needs and wants. And because of that, the economy does not involve public spending, taxes, subsidies, and social security. The three-sector model adds the government sector to the two-sector model. Thus, the three-sector model includes households, firms, and government. Learn about the simple model used to describe where money goes and what it is exchanged for in a market economy. This quiz will test the knowledge acquired by students during the lecture periods focused on the circular flow of the market economy. However, this job is done by financial institutions in the economy. Suppose we add saving and investment to the circular flow. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. Injections are when money is added to the model in the form of government money, exports, or investments. It illustrates the balance between injections and leakages in our economy. The injection that the financial sector provides into the economy is investment (I) into the business/firms sector. When households and firms borrow savings, they constitute injections. As a result, the aggregate expenditure of the economy is identical to its aggregate income, making a circular flow. In a simplified economy with only two types of economic agents, households or consumers and business firms, the circular flow of economic activity is shown in Figure 10. savings (S) in banks accounts and other types of deposit; 2.Paid to the government in taxation (T) e.g. military supplies and equipment). In this market, households are buyers, and businesses are suppliers. Often, the government is the largest, if not the only buyer of a product (i.e. The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. Here we have given NCERT Important Questions for Class 12 Economics Chapter Wise State Board. Important Questions for class 12 economics Investment, Stock, Flows and Circular Flow of Income However, this job is done by financial institutions in the economy. The goods, services, and productive factors are priced, but the way in which their prices are determined pertains to the market mechanisms and not to circular flow model. The circular flow analysis is the basis of national accounts and hence of macroeconomics. What Does Circular Flow Model Mean? 9. Take the labor market, for example. The assumptions of the circular flow model are the following: According to the diagram above, there are two opposing flows between the households and the firms. Businesses use the money to buy inputs in factor markets. CBSE Important Questions for Class 12 Economics Chapter Wise Pdf free download was designed by expert teachers from latest edition of NCERT books to get good marks in board exams. Financial institutions or capital market play the role of intermediaries. The five-sector model adds the financial sector to the four-sector model. In the financial sectorIn terms of the circular flow of income model, the leakage that financial institutions provide in the economy is the option for households to save their money. Taxes (T) imposed by the government reduce the flow of income. Collecting taxes from the household and business sector, Purchasing goods and services from the business sector, Using production factors from the household sector, X – M = net exports, i.e. Copyright © 2020 MyAccountingCourse.com | All Rights Reserved | Copyright |. Every payment has a corresponding receipt; that is, every flow of money has a corresponding flow of goods in the opposite direction. When the domestic business firms export goods and services to the foreign markets, injections are made into the circular flow model. Circular Flow of Income: The circular flow means the unending flows of production of goods and services, income and expenditure in an economy. Thus government purchases of goods and services are an injection in the circular flow and taxes are leakages in the circular flow. Thus, the five-sector model includes households, firms, government, the rest of the world, and the financial sector. The entire NCERT textbook questions have been solved by best teachers for you.