Question

State the circular flow of income in different sectors of the economy. To what extent is its study useful for national economy?

Answer 1

1. Circular flow in a closed economy: A closed economy is an economy that does not have imports and exports. In such an economy, we can discuss circular flow in three parts:
   1. Circular flow in a single sector economy
   2. Circular flow in a two sector economy
   3. Circular flow in a three sector economy
2. Circular flow of income in a two-sector economy: We have previously observed that neither the household sector nor the manufacturing sector saves any money. 
3. Circular flow of income in a three sector economy: Three sectors make up a three-sector economy: the government, business, and domestic sectors. A significant part of a nation’s economic existence is its government.