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Q#3:(A)Supose we extend the circular flow mode to add imports and export copy the circular flow digram onto a sheet paper and then add a foreign country as athird agent.Draw a through sketch of the flows of imports exports and the payment for each on your digrams?

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Answer & Explanation:

Circular Flow model denotes how goods & services, factor incomes & prices move within sectors of economy.

A closed economy has two sectors - households & firms, having following features of circular flow between them:

  • Households provide factor services to firms , & get factor payments from firms in return
  • Firms provide goods & services to households, & get prices for households in return

In case of open economy - with rest of world & foreign country, exports & imports also come in circular flow.

  • Firms export to foreign ROW, receive export payments from them.
  • Households, firms import from foreign ROW, pay their import payments to them.
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