Flow Of National Income In Three Sector Economy Essay

Just to begin with, it is prudent to note that the three sector economy like that found in the United States of America is made up of the government, household and the business sector. This type of economy describes the flow of goods and services between the above mentioned sectors of the economy. The following diagram illustrates a typical three sector economy.
Figure 1: Three sector economy

Households

They are the owners of the factors of production such as labour, land and capital. They always receive income by selling the factors for production to the business firms. Therefore purchasing of groceries implies that the household will have to use part of their income which they acquire from the sale of the factors of production to purchase the groceries from the firm.

Business sector

They are the producers of the final products. They buy factors of production from the households which they in turn use to produce goods and services for sale. Because the level of production of goods and services by the business firms partially depend on the number of the available employees, massive layoff of employees will lower the level of productivity of the firm. The decrease in the level of goods and services produced implies that the business sector may not be in a position to pay efficiently the amount of tax required by the government.

Government

The government is responsible for incurring expenditures on the services as well as goods after which they generate revenue in the form of tax. Because of the massive layoff of employees by the government, the level of production will reduce. A reduction in the level of production will automatically reduce the amount of tax paid to the government. Decrease in tax available to the government means that the amount of revenue available to the government will reduce drastically. As a result government purchases as well as income generating project financed by the government will reduce thereby lowering the level of economic development.

References

Dwivedi, D. N. (2010). Macroeconomics, 3E. U.S.A: Tata McGraw-Hill Education.