Four sector economy consists of household sector, business sector, government sector and foreign sector. It is also known as the open economy. This model is formed by adding foreign sector in three sector economy. The model studies all sectors of the economy dropping all simplifying assumptions made for the two and three sector models.
Assumptions:
- Four sector economy consists of household, business, government and foreign sector.
- There is no restriction on imports and exports.
- There is minimum government intervention.
- There is perfect competition in both internal and external market.
- There is well managed financial market.
- Household exports only labor and capital.
- Business sectors export and import goods and services.
In the above figure, Circular flow of income & expenditure in four sector economy is shown. There are four sector in this economic mode, household, business and government sectors. In this model household sector supply factor of production to business sector and receive the factors payment from business sector. Government imposes both direct and indirect taxes from business sector and grants subsidies whereas household sector only pays direct taxes to the government. Foreign sector is added to three sector economy to form this economic model. Household sector exports capital and manpower to the foreign sector and foreign remittance is received from foreign sector whereas business sector imports and exports goods and services to and from foreign sectors.
