Introduction:

In an economy goods and services and factor services are being constantly exchange between different individuals like producers and household and other individuals in the economy is known as circular flow of income. In other words, circular flow of income is defines as the flow of payment receive for goods and services and factor services between different sectors of the economy.

Economic transaction like sale and purchase of goods and factor services generate two kinds of flows. That is flow of goods and services and money flow. Accordingly circular flow of national income can be view from two different angles real flow and money flows.

The Real flow is the flow of factors services from the household sector to the producing sector and the corresponding flow of goods and services from the producing sector to the household sector

Money flow refers to the flow of factor incomes that is rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services. The household spends their income on the goods and services produced by producing sectors. Money flow back to the producing sector.

Circular Flow of National Income:

Two sector model of circular flow of income:

This model is based on the some assumptions: There are only two sectors in the economy, household and producers. All income is spent on consumption and there is no savings in the economy. Households are the owners of factors of production. Producers hires factor services from the households.

Three sector circular flow model:

The government levies taxes on the households and on the firms and accordingly money flows to the government. The government offers subsidies to the producers and financial help to the households. Thus money flows from the government to the household and producers.

Four sector circular flow model:

The four-sector circular flow of national income is an economic model that illustrates how income and expenditure circulate in an economy, incorporating four sectors like household, firms, Govt and foreign sector. Here the flow of national income is like Real Flow: The movement of goods, services, and factors of production. Monetary Flow: The movement of money as income, expenditure, taxes, and trade payments.

Leakages and withdrawals:-

Leakages: These are those flow variable which have a negative impact on the process of production. They arise because savings are greater than the investment that is the money flows outside economy as payment for imports or taxes by the government or savings. these reduces the flow of income on the economy.

Injections: These are those flows variable which cause and increase in the process of production in the economy. They arise because savings are less than the investment that is; the money flow inside the economy in the forms of receipts for export consumption expenditure by household for the government

also read: explain the classification of tax.