Flow of Funds among Three Sectors (Period 1)

• Period 1

  • Government purchases from domestic private sector

  • Government taxes domestic private sector

  • Domestic private sector trades with foreign sector

    • Spends more on imports than foreigners spend on exports

                                                 Domestic
              Government                         Private                           Foreign

        \                    /            \                    /            \                    /
         \                  /  Spend: 100  \                  /  Import:  5  \                  /
          \                /   --------->   \                /   --------->   \                /
           \              /    Tax:    90    \              /    Export:  3    \              /
            \            /     <---------     \            /     <---------     \            /
             \__________/                      \__________/                      \__________/

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