The economy that consists of Household sector, Business sector and Government sector is called three sector economy. It is also often called as three sector closed economy. It is more realistic than two sector economy as it includes government which plays important role in the economy. This kind of economics is rarely exists in this modern global world.
Assumptions:
- This economy consists household, business & government sector.
- There is government intervention.
- Government imposes taxes and grants subsidies.
- Market is perfectly competitive.
- There is no international trade in this economic model i.e. no imports & exports.
- Government imposes both direct & indirect taxes from business sectors.
- Government imposes direct taxes from household sectors.
Flow of income and expenditure in three sector economic model can be better understood with the help of figure below:
In the above figure, Circular flow of income & expenditure in three 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.
