Circular Flow in a Three Sector Economy

The Three Sector Economy consists of three sectors:
1. Households
2. Firms
3. Government sector: The Government performs the following functions:
Collection of taxes from household sector and the firms.
Transfer payments to household sector while subsidies to firms. (net taxes refer to taxes-subsidies/transfers)
Government purchases the goods and services from the firms.
Government uses the factor services of household sector and pays them.
It saves as well as borrows money with the help of the capital markets (financial markets)