Question

Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the flows of imports, exports, and the payments for each on your diagram.

Short answer

Circular Flow Model:

The circular flow of income (also known as the circular flow of money) model demonstrates how money moves in the economy through the hands of the various entities (here, the four sectors). Firms and households are the core components of the circular flow model, but the open economy four-sector model also includes the government sector and the international market. The equilibrium of injections and leakages is depicted in this model. Government expenditure, exports, and investments are examples of injections, whereas taxes, imports, and savings are examples of leakages.

Step-by-step solution

Definition

Circular Flow Model:

The circular flow of income (also known as the circular flow of money) model demonstrates how money moves in the economy through the hands of the various entities (here, the four sectors). Firms and households are the core components of the circular flow model, but the open economy four-sector model also includes the government sector and the international market. The equilibrium of injections and leakages is depicted in this model. Government expenditure, exports, and investments are examples of injections, whereas taxes, imports, and savings are examples of leakages.

Explanation

To depict the other country, draw a box outside the initial circular flow. To show imports, draw an arrow from the foreign country to the firms. Draw an arrow in the opposite direction to represent import payments.

To show exports, draw an arrow from the enterprises to the foreign countries. Draw an arrow in the opposite direction to represent import payments.