Circular Flow In Three Sector Economy

Circular Flow
‡ Government plays a major role in the functioning & governing of the economic system of a country ‡ Government receives income in the form of tax from households & firms ‡ Government expenditure comprises spending on goods & services & transfer payments. ‡ Money spent by government received by firms & households. hence circular flow. ‡ Thus leakages in the form of saving & taxes

Circular Flow
‡ Introduction of government affects the overall economic activity. ‡ Total expenditure = consumption + investment + government expenditure (E) = C + I + G ‡ Total income received is allocated to consumption , savings & taxes. ‡ Y= C + S + T

Circular Flow
‡ The economy is in equilibrium when the expenditure is equal to income C+I+G=C+S+T I+G=S+T G T=S I

Government

Households

Financial Market s

Firms

Government