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Circular flow of income model

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Circular flow of income model

The circular flow of income model demonstrates the important relationships between sectors in the Australian economy. It can also be useful for understanding and explaining current conditions of these sections. It is a useful tool in evaluating the government budget and areas of spending to keep the economy stable.

The circular flow of income model is made up of five sectors. These include the

household, firms, finance, government, and external sectors. Each of these sectors has a vital and realistic role to play. The household secotr comprises of basic consuming units in society, but it is also the source of supply of the specialised labour force which is required by the firms sector. The business sector comprises of basic productive units in the economy, most production of goods and services is in the hands of private firms motivated by the desire to maximise their profits. The financial sector comprises mainly banks and the centeral bank which are responsible for issueing notes and coins, controlling the supply of money, and providing day-to-day requirements of the community. The government sector fits into the circular flow as a receiber and spender of income. It providescollective goods and services, such as defence, schools, hospitals and flood mitagation programs.The final sector of the circular flow model is the foreign sector. The foreign sector represents another set of leakages and injections in the circular flow and, therefore, another opportunity for loss of equilibrium.

The current state of the household sector is in a slight slump. The household sector is reluctant to buy goods at the cirrent point in time. The income they are recieving is lower than what it has been, which would explain the drop in consumption. There has also been a noticable drop in the amount the sector has been saving. I have based my annalysis for this sector on comments from The Economic Rag stating "National savings levels dropping slightly, possible as a result of the reduction of income levels", and "the recent drop in production levels for both export and domesticaly consumed items". These statements imply that there has been less demand for products by stating that there is a recent drop in production levels.

The business or production sector is in a small slump at the present time. The production of business' has been low due to the decrease ing demand from the household sector. This is brought about from a decrease in wages by the business sector. But this sectors confidence remains solid despite the recent drop in production. My annalysis of this sector ...

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