Four Sector Economy

The Four Sector Economy is a model that describes the flow of goods and services in an economy. It is also known as the Four Sector Circular Flow Income Model. This model is the most realistic one under the current world conditions . The four sectors in this model are households, businesses, the government, and the foreign sector (or the rest of the world) . The foreign sector primarily means the export and import of goods and services. Therefore, this Four Sector Model is also called an Open Economy Model .

In a circular flow of income, every sector plays a dual role. Each sector not only gets a payment from other sectors but pays them as well in one form or another . The household sector plays a critical role in the economic development of any country. This sector acts as a producer, works as a factor of production, and receives transfer payments from the government . The business sector produces goods and services and sells them to the household sector, the government sector, and the foreign sector . The government sector provides public goods and services, collects taxes, and makes transfer payments to the household sector . The foreign sector exports and imports goods and services .

The Four Sector Model does away with the unrealistic assumptions of the two- and three-sector models . It assumes that there are no restrictions on the import and export of goods and services in general . Both domestic and foreign markets feature perfect competition . Household exports labor and capital, while businesses export goods and services .

In the Four Sector Model, imports are treated as expenditure and become a leakage. Whereas exports boost the national income . The determination of equilibrium output/income in the Four Sector Model is similar to that of the Three Sector Model . The equilibrium level of income is determined at the point where the aggregate demand is equal to the aggregate supply . The equilibrium level of income is also known as the Gross Domestic Product (GDP) .

In conclusion, the Four Sector Economy is a model that describes the flow of goods and services in an economy. It is the most realistic model under the current world conditions. The four sectors in this model are households, businesses, the government, and the

Four Sector Economy image

Four Sector Economy