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Word Count: 969
The five-sector circular flow model represents an open economy like Australias and demonstrates the important relationships between the different sectors in the Australian market economy It is the last circular flow model because it does not have any assumptions that need to be left out such as governments and trade The five parts of the model households firms finance Government and overseas sectors work collectively to form the economy The inter-relationships between these sectors create market economic conditions that affect every Australian The model of the economy demonstrates that it literally works as a flow or a cycle It can the be further defined to include two flows one a flow of goods and services and the other a flow of money The flow diagram demonstrates that when one sector is at risk it puts economic market conditions in jeopardy because they are all reliant upon one another The Australian Economy is open which is its open to flows of goods services and capital from overseas using different currencies with fixed exchange rates In the open economy income is used for consumption savings tax or spent on imports The new feature in the five-sector model is the overseas sector that includes imports and exports - Trade The same principles apply to this model as the imports are represented as spending however the money goes out of the economy Money spent on imports by households or firms reduce income spent in the economy and are therefore classified as leakages from the model Imports can be categorised as the consumption of goods and services from the rest of the World and they reduce income expenditure output and employment from the Australian market economy Importing goods mean that fewer Australian resources are utilised and production falls Thus the level of income decreases and the flow of money becomes smaller Eventually however the flow would return to equilibrium but at a lesser rate and the circular flow
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