Discuss briefly, the circular flow of income in a two sector economy model.
Ans. 1. Households:
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Primary consumers of goods and services produced by firms.
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Provide factors of production (labor, land, capital) to firms in exchange for income.
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Receive income from firms in the form of wages, salaries, rent, and profits.
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Firms:
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Producers of goods and services for households.
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Purchase factors of production from households to produce goods and services.
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Generate revenue by selling goods and services to households.
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Circular Flow:
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Households provide factors of production to firms in exchange for income.
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Firms use factors of production to produce goods and services, which they sell to households.
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Households use their income to purchase goods and services from firms.
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This cycle repeats continuously, creating a circular flow of income and goods between households and firms.
