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AHMAD HUSAIN 21001862_EA Answer GEB1023.pdf - The word...

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The word economy has its roots in the ancient Greek word,oikonomia(οἰκονομία). In ancient Greek, the word means roughly management ofhousehold. The word economy in modern English however means much more. Itcomprises of a huge number of matters. However generally it is related toallocation of scarce resources which includes consumption, production andmaybe government intervention.There are 4 sectors in an economy usually. The sectors are household, firms,governments, and the foreign sectors. Household means normal consumers thatbuy products, firms mean the entity that produce products for the economy,government is the party that set rules and regulations in the market, usually toachieve interests in which welfare of the households (in this case, its citizens is inmind) and a foreign sector can be either a firm, households or governments fromareas outside of the political border of a concerning economyA closed economy is a type of economy that does not interact with the foreignsector. It can consist of either 2 or 3 sectors, in which the only possible includedsectors are households, firms and government. In 2-sector economy it onlyinvolves the households and firms. In this situation the parties trade in themarket, where the households provide factor of productions (land, labour andcapital) for the firms while the firms provide the goods, services and also wagesfor the people. This type of economy can be considered as the pure form of thefree market/capitalist market structure. It may exist in early history of mankind,where human communities are not large enough to have a government. It mayalso exist in parts of the globe that modernity hasn’t settled on, such as on theNorth Sentinel Island, India or some native tribes in New Guinea.Even though Malaysia is not a 3-sector economy, we can more or less explain itseconomy by the 3-sector model. A 3-sector economy will include thegovernment, a ruling or rather a governing body that regulates the economy. It isstill a closed economy as it does not trade internationally. The government,besides making the rules, may also engage in other activities such as taxing bothhousehold and firms (the governed), while giving assistance to the governed. Suchassistance can be transfer payments to households, subsidies for companies andother forms of aids. The circular flow of income is illustrated below.
As we can see in the diagram above, households spend on goods and servicesfrom firms. They also spend on taxes as a government is present in Malaysia. Theywill get their income from the government through transfer payments and/orwages. From the firms, households may receive wages if they work with thecompanies. They will receive payments, rents et cetera as the reward for theircontributions of factors of production. The government will spend its budget onpaying transfer payments to its citizens, subsidies to companies and also provideservices and aids to both of them. The government generates its revenue mainlyfrom taxation, where its people and firms are obliged to pay. The firms will get itmuch needed factors of production from the people such as land, labour andcapital. They will also get income from the government from subsidies, paymentsif the government trade with them and others. They will spend their income ontaxes to the government and provide remuneration for the household providing

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