In a closed three-sector economy comprising households, business enterprises, and the gove… — JAMB UTME

In a closed three-sector economy comprising households, business enterprises, and the government, national income is in equilibrium when total leakages equal total injections. If private household savings ( $S$ ) stand at $\text{N}55\text{ billion}$ , tax revenue ( $T$ ) equals $\text{N}25\text{ billion}$ , and private capital investment ( $I$ ) is $\text{N}50\text{ billion}$ , what level of government expenditure ( $G$ ) is required to maintain circular flow equilibrium?

$\text{N}30\text{ billion}$ Answer
B
$\text{N}80\text{ billion}$
C
$\text{N}130\text{ billion}$
D
$\text{N}20\text{ billion}$

Answer

Government expenditure must be

\text{N}30\text{ billion}

to balance circular flow leakages and injections.

In a three-sector closed economy, the equilibrium of national income is achieved when total leakages (

S + T

) equal total injections (

I + G

). Given savings of

\text{N}55\text{ billion}

and taxes of

\text{N}25\text{ billion}

, total leakages equal

\text{N}80\text{ billion}

. Since investment is

\text{N}50\text{ billion}

, government expenditure must be

\text{N}30\text{ billion}

(

80 - 50 = 30

) to balance the flow.

Step-by-Step Solution

Identify the equilibrium condition for a three-sector circular flow model.

Total Leakages (

W

) must equal Total Injections (

J

), where

W = S + T

and

J = I + G

Equilibrium in national income accounting requires all withdrawals from the income stream to be offset by equal additions.

Calculate the total leakages (

W

) from the given data.

W = S + T = 55\text{ billion} + 25\text{ billion} = \text{N}80\text{ billion}

Savings and government taxes represent the two leakage channels in a three-sector closed economy.

Set total injections equal to total leakages and solve for government expenditure (

G

I + G = 80\text{ billion} \implies 50\text{ billion} + G = 80\text{ billion} \implies G = \text{N}30\text{ billion}

Isolating

G

ensures that injections match leakages, stabilizing the circular flow.

Key Concept

Three-Sector Circular Flow Equilibrium (

S + T = I + G

)

Estimated Time:1m 15s

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