Question

Draw a well-labelled diagram to explain briefly the circular flow of income in a three-sector model.

Answer 1

The three-sector economy comprises the household, firm, and government sectors. The three-sector circular flow model is presented below:

As shown in the graph above, households purchase goods and services from businesses and pay for them. Similarly, households supply factor services to businesses and the government in exchange for factor payments.

Households provide factor services to firms, and firms pay for them. Similarly, businesses sell goods and services to individuals and the government and receive payment in exchange. The government collects taxes from businesses and families, then pays them for goods and services and factor services, respectively.