Circular Flow Of Income Diagram In An Open Economy. While a sector receives certain payments from other sectors it pays back to those sectors as well. Likewise people of other countries purchase goods and services not produced domestically i e exports.
Households sell their factor services to firms in the factor markets and in exchange receive wages the left hand side of the flow. The model represents all of the actors in an economy as either households or firms companies and it divides markets into two categories. For example firms have to pay workers to produce the output.
The circular flow of income in four sector economy can be explained by the flowing diagram.
Between economic agents the flows of money and goods exchanged in a closed circuit correspond in value but run in the opposite direction. In the meantime households spend this income on goods and services in the goods market and in exchange receive the goods and services themselves the right hand side of the flow. We can see this circular flow in figure 1. Between economic agents the flows of money and goods exchanged in a closed circuit correspond in value but run in the opposite direction.
