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Explain the circular flow of income with the inclusion of the financial sector *INTRODUCTION:~ The three sector model is actually an extension of the two-sector model.~ Apart from households and business firms, it includes the financial sector on account of the savings and investments made by households and firms.~ Thus, the three sector economy involves factor market, product market, capital market and money market.*ASSUMPTIONS:i) There is some amount of savings and investments by the households and the firms.ii) There is no economic activity by the government.iii) There is absence of international trade.iv) Saving is equal to investments.*ILLUSTRATION:*EXPLANATION:~ The above illustration depicts the circular flow of income in a three sectored economy.~ The three sectors comprise of households, business firms and financial sector.~ The financial sectors evolves on account of savings and investment made by households and firms.~ The inner circular flow represents the REAL FLOW of income whereby the households supply the factors of production to the firms in the form of land, labour, Capital and Enterprise.~ The firms, in return, provide the households with goods and...more
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