What are the main features of the five sector circular flow model? How is equilibrium achieved and what implications does this have for policy makers?

The five-sector circular flow model represents an open economy like Australia's, 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 …

…easily understand the way an open economy such as Australia works. It is a complete model including all possible sectors leaving nothing to assume. On a more careful analysis it even becomes possible to workout ways of stimulating and suppressing the economy using assumptions and simple equations. This model is especially helpful to students seeking an easy way to understand the way an open economy functions and the different affect certain problems can bring about.