Circular flow in a Two-sector Economy

Consumers or households own all the factors of production, that is, land, labour, capital and
entrepreneurship, which are also called productive resources. They sell them to firms for producing goods
and services. The sale of goods and services by firms to consumers in the product market is shown in the
lower portion of the inner circle from left to right; and the sale of their services to firms by households or
consumers in the factor market is shown in the upper portion of the inner circle from right to left. These
are the real flows of goods and services from firms to consumers which are linked with productive
resources from consumers to firms through the medium of exchange or barter.

Circular flow in a Three-sector Economy

To this we add the government sector so as to make it a three-sector closed model of circular flow
of economic activity. For this, we add taxes and government purchases (or expenditure) in our
presentation. Taxes are outflows from the circular flow and government purchases are inflows into the
circular flow.

Circular flow in a Four-sector Economy

The four sector open economy with saving, taxes and imports shown as leakages from the circular
flow on the right hand side of figure, and investment, government purchases and exports as injections into
the circular flow, on the left side of the figure. Further, imports, exports and transfer payments have been
shown to arise from the three domestic sectors—the household, the business and the government.

MACROECONOMIC SECTORS: The four aggregate sectors of the macroeconomy--household, business

firms, government, and foreign--that reflect four key macroeconomic functions and are responsible for
four expenditures on gross domestic product. These four sectors are the primary "actors" on the
macroeconomic stage.
MICROECONOMIC SECTORS: The two sectors of Microeconomics are household and business firms