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Uses of Possibility Curve, The Circular Flow of Economic Activity

 Uses of Possibility Curve, The Circular Flow of Economic Activity
Methods of scientific study

Uses of Possibility Curve

We can ascertain the level of unemployment and underemployment involved in the production with the help of this curve. It helps in giving more output with the availability of resources. Economic growth is monitored along with the production growth. It helps in allocating future resources based on the present trend involved in the production activity. Economic efficiency is possible since efficient selection of the product is carried out along with the efficient allocation of resources and efficient allotment of products produced for the consumers.

The Circular Flow of Economic Activity

Economic problem is that the scarcity which is resolved by three institutions and they are (i) House hold, (ii) Firms and (iii) Government. These are keenly involved in three fiscal activities of production, consumption and trade of commodities. The decision makers perform in such a way that all economic activities move in a circular form. There are two-sector, three-sector and four-sector economy circle in which two-sector implies simplified economy which include household and firms, three-sector flow consists of moderate economy which includes government's taxes and expenditure. Four-Sector flow consists of all that is dealt with the above sectors and includes foreign sector. We are going to see the four-sector circular flow which comprises of all the sectarian types.

Circular Flow in a Four Sector Economy

Exports are the inflows in the circular flow of economy and hence it plays an important role. The inflows, outflows of household, business firm and government sectors are in relation to the foreign sector. The household sector buys products from abroad and compensates for them. On the other hand, business firm exports products to foreign countries and its receipts are in the circular flow. Likewise business firm pays for the import which has made for the capital goods, machinery, raw materials, and consumer goods to the foreign sector from overseas. For all the exports and imports made, government receives payments in the form of duties. Hence all the four sectors are inter-related in the circular flow. The circular flow will look like the following.


The imports, exports and transfer of payments arise from the other three domestic sectors of the household, firm and government. The outflows and inflows from the foreign sectors are termed as "Balance of Payments Sectors".

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