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The 5 Sector Market Economy

Jamie Z 2024-05-23

Learning Goals

  • Recall two sector circular flow model
  • Identify why the economy is important
  • Describe 5 sectors of the economy

Circular Flow

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In the five-sector model of the economy, also known as the circular flow of income model, the relationship between the household sector and the business sector is one of mutual interdependence. Here's a detailed look at how these two sectors interact:

Household Sector

  1. Consumption: Households consume goods and services produced by businesses. This is one of the primary ways in which money flows from the household sector to the business sector.
  2. Supply of Factors of Production: Households supply factors of production (labor, capital, land, and entrepreneurship) to businesses. In return, they receive income in the form of wages, rent, interest, and profits.

Business Sector

  1. Production: Businesses produce goods and services that are consumed by households. This production process requires inputs, which are provided by the household sector.
  2. Payment for Factors of Production: Businesses pay households for the use of their factors of production. This payment constitutes the households' income.

The Economy

  • The reserve bank of Australia has the responsibility of managing how much money is circulating in our economy. They ensure there is not too much and not too little

Too little

  1. Low business profit (negative wage growth)
  2. High unemployment
  3. Low interest rates
  4. Low inflation

Too much

  • High interest rates
  • High inflation
  • High cost of living