Circular flow of income in two three and four sector economies

The economy consist of two sectors : households and firms

Households spend all of their income (Y) on goods and service or consumption (C).

There is no saving (S) .All output produced by firms is purchased by Households through their expenditure (C)

There is no financial sector ,government sector and foreign sector

Income (Y) from firms to households is equal to consumer spending (C) plus saving (S)

Y = C t S

However,saving here do not go to ther firms. This represents a leakage from the circular flow

For firms,payment for productions equal with sale of goos (C) plus investment (I)

Y = C t I

For leakage equal injection : S =I

It includes household sector,firms and government sector

There will be additional leakage and injections

Government spending will be injected into the circulat flow & the taxatioon will leak from it

Purchases of goods and services as well payment of benefit or subsidies are called government expenditure (G)

taxes are collected by the G is a leakage as money goes out of circular flow

tHerefore in a three sector economy,the equilibrium is: Y = C t I t G

Leakage equal injection equation : I t G = S t T

International trade sector must also included

There is now export and import

For exports,country receives payment from abroad .While imports are payment made for purchase the goods and service to foreigners.So,import is a leakage.

Y = C t I t G t X - M

leakage equal injection equation : I t G t X = S t T tM