top-rated free essay

Five sector circular flow of income of Australian economy

By beaches123 Jan 27, 2014 566 Words
Outline the main features of the five-sector circular flow of income model of the Australian economy. Explain how leakages and injections influence the level of economic activity.

The five sector circular flow of income model describes the operation of an economy and the linkages between the main sectors in an economy. The model divides the income to five sectors; the individuals, Businesses, financial institutions, governments and international trade and financial flows.

The individuals consist of all individuals in the economy and looks at their activities such as earning income and spending it on goods and services. They supply factors of production (inputs) such as labour and enterprise to businesses who then produce goods and services. Individuals then receive incomes as rent, wages, interest and profits.

It is important to think of the individuals sector and the business firms together as together they affect the amount of economic activity in a circular flow of income. The businesses buy factors of production and use them to sell goods and services. They are dependent on individuals, as their spending becomes their income to then spend on producing the goods and services in demand for the consumers. Individuals and businesses are interdependent they are both needed to exist.

The institutions involved in the borrowing and lending money of money are the financial institutions sector. They act between the savers and borrowers of money and consist of; banks, building societies, finance companies, credit unions, superannuation funds and life insurance companies. It enables individuals and businesses to both save and borrow money. The financial institutions mobilise savings so they can be used for investment.

In the circular flow of income savings are leakages as it is money withdrawn causing a reduction in both the circular flow of income and in economic activity. The leakage of savings causes a fall in expenditure on goods and services, a fall in production, a fall in the demand for resources and a fall in income to the owners of those resources. To counteract the leakages of savings there are injections of investment.

Investment is any current expenditure that is made in order to obtain benefits in the future. Investments represent an injection into the circular flow and have the opposite effect of a leakage. Spending on investment would lead to rising expenditure, production, employment and income levels in the economy. The individuals, businesses and financial institutions make up the private sector of our economy.

The government sector consists of the Commonwealth, state and local. They are responsible for collective (community) wants and obtain resources by imposing taxes on the other sectors of the economy. The government then uses tax revenue to undertake government expenditure. Taxation is a leakage in the economy and causes a reduction in the level of economic activity. Government expenditure represents an injection as it goes towards collective goods and services. The sector is our public sector and together with the private sector makes up the domestic sector in our economy. International trade and financial flows cover all transactions that our economy has with the rest of the world. This includes exports, imports and international money flows. Imports are goods and services produced overseas but sold in Australia and these payments represent leakages from the circular flow. Exports are goods and services produced in Australia but sold overseas to overseas customers and increase the size of the circular flow, as they are injections.

Cite This Document

Related Documents

  • The Circular Flow of Income and Expenditure

    ...The Circular Flow of Income and Expenditure The circular flow of income and expenditure refers to the process whereby the national income and expenditure of an economy flow in a circular manner continuously through time. The various components of national income and expenditure such as saving, investment, taxation, government expenditure...

    Read More
  • Circular Flow of Economy

    ...article explains how an economy can become in a disequilibrium and how recessions and booms happens in a market economy. | |The circular flow of income model is a model used to show the flow of income through an economy. Through showing the leakages in| |the economy and the injections, the different factors affecting the economic activities ...

    Read More
  • Circular Flow of Income

    ...In economics, the terms circular flow of income or circular flowrefer to a simple economic model which describes the reciprocal circulation of income between producers and consumers.[1][2] In the circular flow model, the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and provide ea...

    Read More
  • Circular Flow

    ...CIRCULAR FLOW OF INCOME The Circular Flow of Income, expenditure and output is a model of the economy which shows the movement of goods and services between households and firms and their corresponding payments in money terms Money circulates from households to firms and back again. The more a households spend and the more firms produce, t...

    Read More
  • Circular Flow Model

    ...The circular flow of income model is a theoretical representation of the economy. It shows the distribution of income within the economy and the interaction between the different sectors in a modern market economy. The five-sector model is a more elaborate model in comparison to the basic, two, three and four sector models. The model represents ...

    Read More
  • What are the main features of the five sector circular flow model? How is equilibrium achieved and what implications does this have for policy makers?

    ...The five-sector circular flow model represents an open economy like Australia's, and demonstrates the important relationships between the different sectors in the Australian market economy. It is the last circular flow model because it does not have any assumptions that need to be left out such as governments and trade. The five parts of the mod...

    Read More
  • Economics Circular Flow

    ...The Economics of Business and Management Assignment No. 3 & 4 Q1 Draw and label the circular flow model and use it to answer the following: [pic] The circular flow can be explained very easily with a simple formula. GDP (gross domestic product) = C + I + G + X – Z= = C + S +T – B In here C is the consumption, I is i...

    Read More
  • Circular Flow Diagrams

    ... Circular Flow Diagrams Introduction Money flows into and out of the economy. The circular flow diagram explains how money moves through the economic system involving households, businesses, the government, and foreign agents (Editorial Board, 2011). Circular flow diagrams are visual models that show firms who employ workers, the workers t...

    Read More

Discover the Best Free Essays on StudyMode

Conquer writer's block once and for all.

High Quality Essays

Our library contains thousands of carefully selected free research papers and essays.

Popular Topics

No matter the topic you're researching, chances are we have it covered.