Circular Flow Of Income in a four sector economy :- 

Circular flow of income in a four sector economy consists of Households , Firms , Government and Foreign Sector . The money flows in each sector are as follows : 

1. Household Sector -  Households provide factor services to firms , government and foreign sector. In return , it receives factor payments. Households also receive transfer payments from the government and the foreign sector. Household spend their income on : 

a. Payments for goods and services purchased from firms

b. Tax payments to government.

c. Payment for imports 

2. Firms: Firms receive revenue from household , government and the foreign sector for sale of their goods and services and also receives subsidies from government.

Expenses-

a. Factor payments to households

b. Taxes to the government 

c. Imports to the foreign sector 

3. Government - Government receives revenue from the firms, household and the foreign sector for sale goods and services , taxes , fees , etc., makes factor payments to household and also spend money on transfer payments and subsidies. 

4. Foreign Sector - Foreign sector receives revenue from firms, household and government for export of goods and services . It makes payments for imports of goods and services from firms and the government. 

The saving of household , firms and the government sector get accumulated in the financial market. Financial market invests money by lending out money to household , firms and the government. 





Leakages: With drawl of money from the circular flow of income. It refers to that part of income which does not pass through the circular flow of income. As a result , it is available for spending on currently goods and services. Leakages reduce the flow of income. 

Significance of Circular Flow of Income : 

1. It helps us to understand the mutual interdependence among different sectors of the economy. 
2. It shows the equilibrium position of the economy. 
3. It helps in identifying various types of leakages and injections in the economy. 
4. It helps in estimation of national income. 

Consumption= Production 
Exports= Imports 
Borrowings= Savings 
 
Leakages: With drawl of money from the circular flow. It refers to that part of income which does not passes through circular flow of income. As a result , it is not available for spending on currently goods and services. Leakages reduce the flow of income. 

Example of leakages in different types of economies;

1. Two sector economy ( Without Financial Market) = No leakage
2. Two sector economy ( With F.M.)= Savings 
3. Three sector economy = savings + Taxes 
4. Four sector economy = Savings + Taxes + Imports 

Injections : Introduction of income in the circular flow. When household and firms borrow money from external sources like financial institutions , it adds to their income . Injections increase the flow of income. 

Examples of injections in different types of economies : 

1. 2 sector economy (Without financial market ) = No injections 
2. Two sector economy ( With F.M)= Investment ( from borrowings ) 
3. Three sector economy  = Investment + Government Expenditure 
4. Four Sector economy = Investment + Gov. Expenses + Exports 

Note :- When Injections = Leakages , Economy is in equilibrium