The flow of income impacts the National Income of the country. It shows the flow of money among economic sectors through two, three and four sector models. But, the decrease in money flow due to disasters is not considered.Īll in all, the circular flow model provides an idea about the working of the economy. Natural Disasters: Natural disasters cause huge damage to the country’s economy.Dynamic Environment: The dynamic environment leads to continuous changes in the economy.Non-Monetary Transactions: Non-monetary transactions are excluded from the model.It does not provide a clear picture of the economic equations. Assumptions: These models are based on assumptions.The model helps to detect causes and remedies for the imbalance in the economy.Represents the overall health of the economy.It shows the interdependence of economic sectors and their activities.Gives an idea about the injection or leakage in the flow of money.The income flow from sectors should always show receipts and payments.The real and money flow are opposites, which causes a circular flow.The receipts from them should be in the opposite direction. The mobilization of goods and services should be in one direction.In the exchange process, the amount purchased should be equal to the amount spent.Therefore in the Four-sector model, the equilibrium is obtained when For example, Foreign Direct Investment (FDI). The foreign sector invests and borrows money from the financial market. Also, it receives payment through duties and taxes during foreign trade. It receives payments for exports and makes payments for imports. The government export and import goods and services to/from the foreign sector. In return, they receive payments for the exports. The firm exports goods and services to the foreign sector. They receive factor payments and transfer payments from the foreign sector. The household provides human resources and pays for imports to the foreign sector. The flow of income between foreign and different sectors is as follows:
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