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Macro Economics

Notes Money flows from the government to the firms in form of subsidies and payment made for the
goods purchased.
Figure 2.3

2.5.3 Circular Flow of Income in a 4 Sector Model

In a four sector model, an economy moves from being a closed economy to an open economy.
In an open economy imports and exports are made. You must understand that one country's
exports are other country's imports. In case of a country imports, money flows to the rest of the
world and in case of exports, money flows in from the rest of the world. An economy experiences
a trade surplus if its exports exceed its imports. On the other hand, there is a trade deficit if
imports exceed exports. Imports act as leakages and exports as injection into the circular flow of
income in an economy.

Figure 2.4: Circular Flow of Income in a 4 Sector Model

Expenditure on Consumption
Domestic products Expenditure

Source: www.maeconomics.web.com

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