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Published: 16-09-2019

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Circular Flow Model

What is the 4 sector circular flow model? A circular flow of revenue is a four-sector economy which contains households, firms, government and foreign sector. The circular flow of revenue indicates connections among various regions of our economic method. It revolves about flows of goods and services and aspects of production among firms and households.

Household Sector

Households offers issue services to firms, government and foreign sector. In return, the households receive aspect payments. They also obtain transfer payments from the government and the foreign sector. They also spend their earnings on payment for goods, services that are purchased from firms, taxes for government and payments for imports.


Firms receive income from households, government and the foreign sector for sale of their goods and solutions. Firms also acquire subsidies from the government. Firms, like households also pay taxes to the government. They also make payments for factor solutions to households and imports to the foreign sectors.


Government receives revenue from firms, households and the foreign sector for sale of goods and services, taxes and fees. Government tends to make element payments to households and also spends income on transfer payments and subsidies.

Foreign Sector

Foreign sector receives revenue from firms, households and government for export of goods and services. It tends to make payments for import of goods and services from firms and the government. It also tends to make payment for the aspect solutions to the households. The savings of households, firms and the government sector get accumulated in the financial market place. Economic industry invests income by lending out funds to households, firms and the government. The inflows of funds in the financial market place are equal to outflows of money. It tends to make the circular flow of income full and continuous. Withdrawals There can be withdrawals or leakages from the circular flow as not all revenue will flow from households to organizations directly. The circular flow shows that some portion of household income will be put aside for future spending, for instance, savings (S) in banks accounts and other sorts of deposit, paid to the government in taxation (T) e.g. earnings tax and national insurance and spent on foreign-produced goods and solutions, i.e. imports (M) which flow into the economy. Withdrawals are increases in savings, taxes or imports so minimizing the circular flow of revenue and leading to a multiplied contraction of production (output).


Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of revenue top to a multiplied expansion of output. Three examples of injections are Capital spending by firms, i.e. investment expenditure (I) e.g. on new technology, The government, i.e. government expenditure (G) e.g. on the NHS or defense and Overseas buyers acquiring UK goods and service, i.e. UK export expenditure (X).
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