Four-sector model
Topic: National Income Accounting: GDP, GVA and Welfare · NCERT: Class 12, Ch 1 "Introduction (Macroeconomics)"
Meaning
The four-sector model views the whole economy as four groups of decision-makers: households, firms, the government sector and the external sector (the rest of the world). Households supply factor services and consume. Firms produce. The government makes laws, taxes and spends. The external sector links the economy to other countries through exports, imports and capital flows. The model helps us trace how income and spending move around the economy.
Example
An Indian family (household) works in a car plant (firm) and pays income tax to the government. The government spends that tax on a new road. The plant exports some cars and imports some parts through the external sector.
Don't confuse with
- Two-sector model: this model has only households and firms, with no saving, government or foreign trade. It is the simplest version of the circular flow of income.